US banks’ supervisory ratings subject of Fed review seeking more consistency, predictability

The US Federal Reserve is exploring how to improve its ratings of banks’ overall condition and how much to disclose of these financial and management risk figures.

Randal Quarles, the Fed’s vice chairman for supervision, said he has asked staff to look into several issues in an effort to increase the consistency and predictability of these confidential ratings.

“My concern is that, despite the fact that our examiners have used ratings for almost 100 years, we don’t have a particularly well-developed theory of ratings,” he said at a conference last week. “Banks could benefit because they would be better positioned to anticipate supervisory feedback and understand what steps they need to take to improve their ratings.”

“Supervisors can benefit,” Quarles added, “by being grounded in more predictable criteria.”

Ratings affect whether banks can expand into fields such as securities and insurance underwriting, and whether they can make acquisitions.

— More disclosure? —

Esther George, head of the Kansas City Fed, expressed “qualified” support for disclosing more about bank ratings and key exam results of the largest banks.

“Greater disclosure can create incentives for more responsible risk management and contribute to a strong and trusted banking system,” she said at the same conference.

At the same time, she said, consideration should be given to how much detail to reveal, as well as the process and standards for disclosure.

George urged Fed officials and banks to assess how greater transparency might affect financial stability and risk management.

Currently, significant bank exam results are disclosed only when enforcement actions are taken.

— Fed review —

The review requested by Quarles is looking in part at whether Fed curtailment of a bank’s expansion is properly calibrated to its weaknesses.

Fed staff also is looking at whether the central bank’s 2018 Large Financial Institution ratings framework is more effective than the more complicated regime it replaced. The new ratings focus on capital, liquidity and governance.

The review also is looking at how to make clearer to the public the Fed’s weighting of the qualitative risk-management, as well as the quantitative capital and liquidity, elements of the ratings, Quarles said. Part of this evaluation is whether these relative weightings seem correct.