Revised bank holding company rating system

Federal Reserve Bulletin, Wntr, 2005

The Federal Reserve issued on December 1, 2004, a revised bank holding company (BHC) rating system. The revised system more closely aligns the Federal Reserve's rating process with the focus of its current supervisory practices by placing an increased emphasis on risk management, providing a more flexible and comprehensive framework for evaluating financial condition, and requiring an explicit determination of the likelihood that the nondepository entities of a BHC will have a significant negative effect on the depository subsidiaries. The revised rating system became effective January 1, 2005.

Under the revised rating system, each BHC is assigned a composite rating (C) based on an evaluation and rating of three essential components of an institution's financial condition and operations. These three components are: Risk Management (R); Financial Condition (F); and potential Impact (I) of the parent company and nondepository subsidiaries on the subsidiary depository institutions. A fourth rating, Depository Institution (D), mirrors the primary regulator's assessment of the subsidiary depository institutions. A simplified version of the rating system that includes only the R and C components will be applied to noncomplex bank holding companies with assets less than $1 billion.

To provide a consistent framework for assessing risk management, the R component is supported by four subcomponents that reflect the effectiveness of the banking organization's risk management and controls. The F component is supported by four subcomponents reflecting an assessment of the quality of the banking organization's Capital; Asset Quality; Earnings; and Liquidity.

The policy also contains guidance on implementation of the revised rating system based on BHC size and complexity.