Federal Reserve Introduces New BHC Rating System

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:

  • risk management (R);
  • financial condition (F);
  • potential negative impact (I) of the parent company and non-depository subsidiaries on bank and thrift subsidiaries;
  • depository institution (D), which mirrors the primary regulator's assessment of the subsidiary depository institutions.

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:

  • board and senior management oversight;
  • policies, procedures and limits;
  • risk monitoring and management information systems; and
  • internal controls, reflecting the effectiveness of the banking organization's risk management and controls.

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.

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