The American Bankers Association and the Bank Policy Institute have expressed their support for proposed changes to the Federal Reserve's Large Financial Institution (LFI) rating system. In a letter addressed to the Federal Reserve, both associations argued that the current system does not accurately reflect bank performance and restricts banks' ability to serve customers effectively.
"If report cards worked like the current LFI ratings framework, a student’s GPA would equal their lowest grade," the associations said. "This wouldn’t give a complete picture of a student’s performance, and the current LFI ratings approach doesn’t give a complete picture of bank condition."
The LFI rating system evaluates banks based on three components: capital planning and positions, liquidity risk management and positions, and governance and controls. Under this system, if any one component is rated unsatisfactory, a bank is deemed less-than-satisfactory overall, even if other areas are strong. This can limit banks' abilities to expand services or engage in new investments.
According to the associations, over two-thirds of large banks received unsatisfactory ratings under this framework despite regulators asserting that large financial institutions remain robust. The associations urged the Federal Reserve to adopt proposed changes promptly.
Additionally, they recommended several reforms: focusing on objective financial risks, revising other rating frameworks like CAMELS to prioritize financial risk, enhancing transparency in ratings processes, and considering economic growth when defining large financial institutions.
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