Fed Large Governance, Rating
On Aug. 3, Fed proposed governance, and ratings, for large firms.
- Two proposals on corporate governance and rating system of large institutions.
- Governance Expectations
- Corporate governance proposal to enhance effectiveness of board of directors.
- Refocus expectation of large firms' boards of directors on core responsibilities.
- Core responsibility includes overseeing types and levels of risk, firm may take.
- Also included alignment of the firm's business strategy, to these risk decisions.
- Would also reduce unnecessary burdens applied to board of smaller institution.
- Components of Governance
- Identify board attributes to set clear and consistent strategic direction of firm.
- Support independent risk management, hold management of firm accountable.
- Fed will use these attributes to evaluate a large firm's governance and control.
- For all supervised firms, most supervisory findings should be communicated to
the firm's senior management for corrective action, rather than to their board.
- Identify existing expectations for boards of directors that could be eliminated.
- Composition, governance, practices suits firm size, complexity, scope and risk.
- Ratings System-Background
- Separate proposed rule aligning Fed's rating system with supervisory program.
- New scale in which ratings are assigned on capital, positions, liquidity, control.
- However, standalone composite rating would not be assigned to an institution.
- Current supervisory program for large firms was introduced post-crisis in 2012.
- Sets higher standards, to lower probability of firm's failure or material distress.
- Changes to rating system will incorporate change made by the Fed since 2012.
- New Rating Scale
- On capital, liquidity, effective governance and control, and compliance to law.
- Supervisors would assess and assign confidential ratings in all of the categories.
- New rating system only applies to larger firms, e,g, US BHC above $50bn assets.
- As well as the intermediate holding companies of foreign banks operating in US.
- The new ratings would not apply to insurance companies supervised by the Fed.
- Firms below $50bn in assets, would continue to use their existing rating system.
- Revisions to provisions in Reg K and LL to remain consistent with rating system.
- Aug. 2017 Federal Register
- On Aug. 9, 2017, Fed governance rules in federal register, comment to Oct. 10.
- On Aug. 16, 2017, Fed rating system rules in federal register, comment Oct. 16.
- Fed proposes to assign initial ratings, under the new rating system, during 2018.
- Aug. 2017 Powell Defends Rule
- On Aug. 30, 2017, Fed governor Powell defended rule, after criticized for laxity.
- Expected much more of boards than before crisis, and no reason to change this.
- Directors feel buried in up to thousands of pages of highly granular information.
- Can lead to more important strategic issues crowded out of board deliberations.
- Supervision may downplay, difference in role between boards and management.
- Event of unexpected loss or compliance failure should cause boards to reassess.
- Board would continue to receive MRAs where board practices are at issue or the
bank management has failed to promptly and adequately take required actions.
- Board would also continue to get copies, of examination and inspection reports.
- Oct. 2017 Extended Comment
- On Oct. 5, 2017, Fed extended comment period from Oct. 10, to Nov. 30, 2017.
- On Oct. 11, comment extension to Nov. 30 by Fed published in federal register.
||Bank; SIFI; Thrift; BHC; IHC
||Ratings RIN 7100-AE82, Reg K, Reg LL; Governance 82 FR 37219, 8/09/2017, OP-1570, PR, 8/3/2017
||Compliance; C-Suite; Exams; Financial; Legal; Reporting; Risk; Treasury
||United States of America
Last substantive update on 10/10/2017