The Fed’s ‘Well Managed’ Review: What Banks Should Know

The Federal Reserve is considering a major change to how it assigns the coveted “well managed” rating to large financial institutions—and, as explained in a new RMA Journal by ProSight article, big banks are watching closely. 

Right now, under the Fed’s Large Financial Institution Rating System (LFI), banks must earn satisfactory ratings in all three supervisory pillars—capital, liquidity, and governance and controls—to achieve “well managed” status. Under the proposal, firms with more than $100 billion in assets ($50 billion for foreign banks) could still get the top mark even if one pillar is rated “deficient.” 

For banks, the stakes are high. A “well managed” rating opens the door to certain acquisitions and investments without prior Fed approval, while falling short can bring growth restrictions, enforcement actions, and tougher timelines for remediation. 

Fed Governor Michael Barr cast the lone vote against the proposal in July, warning it would allow “firms that are not well managed to be treated as though they were” and reduce incentives to fix serious shortcomings. 

Two principals at Deloitte, Richard Rosenthal and Irena Gecas-McCarthy, offered perspectives on the proposal: 

What This Means for Banks 

• Governance and controls remain under scrutiny. In the first half of 2024, two-thirds of outstanding supervisory matters involved governance and controls, including operational resilience, cybersecurity, and BSA/AML. “The challenge is that the steps for remediating and resolving the issues could require multi-year programs, with unclear criteria,” Gecas-McCarthy said. 

• Subjectivity is part of the problem. Many banks view governance ratings as inconsistent. Given the high rate of “deficient” ratings, many in the industry have come to consider the approach to governance and controls under LFI too subjective, Rosenthal said. 

• Financial strength still matters most. The Fed appears to be re-weighting the importance of capital and liquidity. As Rosenthal put it: “I think you’re seeing a major paradigm shift between administrations and a view that maybe [supervisory bodies] went a little too far in management and control factors that drive ratings and didn’t emphasize financial risk enough.” 

Play the Long Game 

While the proposal may be seen as a relief—giving banks more leeway in the near term—some experts say that’s no excuse to ease up. “It pays banks to build a sustainable risk and control framework resistant to changes in administration and agnostic to the pendulum swings of regulations,” Rosenthal said. That means investing in talent, infrastructure, and processes while tracking emerging risks like AI and digital assets. 

As Gecas-McCarthy noted: “We advise clients to play the long game and align to what makes sense for their strategy, business/operating model, and their risk profile.”