Proposed Revisions to the Federal Reserve’s LFI Rating System

On July 10, 2025, the Board of Governors of the Federal Reserve System (“FRB”) issued a request for comment on proposed revisions to its large financial institution (“LFI”) supervisory rating system (the “LFI Framework”). 

If finalized as proposed, the revisions would allow large depository institution holding companies with only one “Deficient-1” rating in the three LFI rating components to be considered “well-managed.”  Firms that are not “well managed” are not eligible for expedited processing of certain supervisory applications and face constraints on, among other things, expansionary activities and investments in and acquisitions of non-bank financial companies.

Although the FRB has proposed a set of specific revisions to the LFI Framework, it has also requested comment on a number of potential alternative revisions.  The FRB has also invited comments on whether it should make changes to other supervisory ratings systems, including the CAMELS system. 

Below, we summarize the proposed changes to the LFI Framework, the FRB’s requests for comment, and four statements from FRB Governors related to the proposal.

Summary of Existing Framework and Proposed Changes.  The LFI Framework, which the FRB initially adopted in 2018, generally applies to depository institution holding companies with $100 billion or more in assets and large intermediate holding companies of foreign banking organizations.  As of Q4 2024, 36 firms are subject to the LFI Framework. 

The LFI Framework applies a four-point, non-numeric scale to measure an LFI’s performance across three component areas:  (1) capital planning and positions, (2) liquidity risk management and positions, and (3) governance and controls.  The FRB assigns one of four ratings to each component:  “Broadly Meets Expectations,” “Conditionally Meets Expectations,” “Deficient-1,” or “Deficient-2.”

Under the current LFI Framework, an LFI must receive, at a minimum, a “Conditionally Meets Expectations” rating across all three component areas to remain classified as “well managed.”  An LFI that receives a single “Deficient-1” rating forfeits its “well managed” status and presumptively is subject to a formal or informal enforcement action.  In practice, this often means that a firm with adequate capital and liquidity planning and positions may lose its “well managed” status and become subject to an enforcement action based solely on governance and controls-related observations.

The FRB’s proposal would revise this rating system such that an LFI that receives a single “Deficient-1” rating would nonetheless remain “well managed,” so long as the other two components are rated “Conditionally Meets Expectations” or better.  The proposal would also remove the current “strong presumption” that a firm with a “Deficient-1” rating will be subject to enforcement action.  The proposal would not change the criteria for determining the appropriate rating within each component. 

Table:  Summary of Proposed Changes

The preamble to the proposal states that the FRB is proposing these changes for a number of reasons. 

• First, in overseeing the LFI Framework since its adoption in 2018, the FRB has observed that a single Deficient-1 component rating is often the product of a discrete operational or financial deficiency that does not impact the overall condition of the firm.
• Second, the proposed changes would better align the LFI Framework with the FRB’s view of the current condition of the banking system.  Despite the fact that “the banking system remains sound and resilient overall,” over half of LFIs are considered not “well managed” under the current LFI Framework.
• Third, the proposal would align the LFI Framework with the FRB’s other supervisory ratings frameworks, including the CAMELS system, none of which assesses an institution’s overall performance by reference to only a single component rating.

Requests for Comment.  The FRB has requested comment on a number of questions related to the proposal. 

• Some of these questions relate to alternative proposed revisions to the LFI Framework.  For example, the FRB has invited comment on the potential advantages and disadvantages of revising the LFI Framework to (1) allow a firm to remain classified as “well managed” if it has a “governance and controls” component rating of “Deficient-2”; (2) allow a firm to remain classified as “well managed” even if it has a single “Deficient-2” component rating in any component; (3) provide that a firm is not “well managed” if it fails to remediate a “Deficient-1” component rating within a certain time period.
• The FRB has also asked whether it should establish a composite rating that would be used to determine whether a firm is “well managed” under the LFI Framework and, if so, what definitions and standards should apply to the composite rating.
• Further, the FRB has asked what changes it should consider making to other supervisory ratings systems (e.g., the CAMELS and RFI/C(D) ratings systems) to reflect recent experiences in the banking system, to align the system with the proposed revisions to the LFI Framework, and to ensure that a firm’s “well managed” status is appropriately calibrated.  The reference to the interagency CAMELS ratings system may be intended to set the stage for broader, multi-agency reform.

Comments in response to the FRB’s proposal are due 30 days after the proposal’s publication in the Federal Register.

Summary of Governors’ Comments.  The FRB approved the proposal by a vote of 5-1, with Governor Adriana Kugler abstaining.  Four FRB Governors issued separate statements on the proposal. 

• Michelle Bowman, the FRB’s Vice Chair for Supervision, stated that the “proposal is the first step in pursuing a broader goal, which is to ensure that supervisory activities, and the accompanying ratings, are aligned with a renewed supervisory focus on core, material financial risks.  ”She also suggested that the FRB may evaluate other changes to its supervisory ratings systems, including adding a composite rating for the LFI Framework and “revisiting the weighting of the management and risk management components respectively under the CAMELS and RFI frameworks in determining a holding company’s or bank’s composite rating.”
• Governor Michael Barr, who voted against the proposal, stated that it would “allow[] firms that are not well managed to be treated as though they were,” that the removal of the presumption of enforcement for firms with a “Deficient-1” rating “decrease[s] firms’ incentives and urgency to remediate serious shortcomings,” and that the proposal is inconsistent with the legal definition of “well managed” under the Gramm Leach Bliley Act of 1999.
• Governor Lisa Cook stated that “certain design features of the LFI framework,” as opposed to firms’ actual overall conditions, may have contributed to the fact that “a majority of banking organizations subject to the LFI framework . . . do not qualify as ‘well managed.’”  She also argued in favor of using a composite score to evaluate whether a firm is well managed.
• Governor Kugler stated that the FRB’s proposal may allow firms to remain “well managed” even when examiners observe multiple deficiencies that fall within a single component rating.  Governor Kugler explained that a composite measure would “foster[] a more comprehensive assessment of an LFI.”  She added that she would be paying “close attention” to comments on the proposal’s composite rating option.

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