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.

Regulators Fed
Entity Types Bank; SIFI; Thrift; BHC; IHC
Reference Ratings RIN 7100-AE82, Reg K, Reg LL; Governance 82 FR 37219, 8/09/2017, OP-1570, PR, 8/3/2017
Functions Compliance; C-Suite; Exams; Financial; Legal; Reporting; Risk; Treasury
Countries United States of America
Products Banking; Corporate
Regions Am
Rule Type Proposed
Rule Date 8/3/2017
Effective Date 11/30/2017
Rule Id 33446
Linked to N/A
Report Issue 10/15/2017
Report Section US Banking

Last substantive update on 10/10/2017