The Federal Reserve has introduced a new bank holding company (BHC) rating system emphasizing risk management. The new rating system uses a 1 (best) to 5 (worst) scale. Each BHC will be assigned a composite rating (C) that is based on an evaluation of three essential components: the effectiveness of its risk management program, its financial condition and the impact of its operating practices on its depository subsidiaries.
The specific rating components are:
Thus, the new rating is displayed: R F I/C (D).
To provide a consistent framework for assessing risk management, the R component is supported by four sub-components:
The F component is also supported by four sub-components reflecting the amount and quality of the BHC's capital, asset quality, earnings and liquidity.
For the vast majority of BHCs with assets below $1 billion, a simplified version of the new rating will contain only the R and C ratings. More information about the new rating system can be found on the Fed's online course, http://stlouisfed.org/col/courses/bhc/why/index.cfm.