The Federal Reserve is making changes to its regulations for big financial institutions, specifically altering the criteria for what constitutes a “well-managed” bank. This new proposal, which was introduced for public comment on Thursday, would allow banks with one “deficient” rating to still be classified as well-managed. The ratings are based on three key criteria: capital, liquidity, and governance and controls.
Previously, rules established in 2018 stated that any deficiencies would disqualify a bank from being considered well-managed, thereby restricting certain activities such as making acquisitions. However, the proposed change aims to provide a more holistic assessment of a bank’s overall condition when determining its management status. Fed Vice Chair for Supervision, Michelle Bowman, emphasized that the proposal takes a pragmatic approach to evaluating a bank’s management.
Despite Bowman’s support for the proposal, her predecessor Michael Barr expressed strong opposition, arguing that the new definition of well-managed would introduce greater risk to the banking system. Governor Adriana Kugler also voiced concerns about the potential risks associated with the proposed changes, acknowledging the flaws in the current system but cautioning against swinging too far in the opposite direction.
This latest proposal follows the Fed’s recent approval of new capital rules for large banks, a decision that was met with objections from both Barr and Kugler. The ongoing debate over regulatory changes highlights the complex balancing act facing regulators as they seek to promote financial stability while also allowing for innovation and growth in the banking sector.
As the financial industry continues to evolve, it is crucial for regulators to carefully consider the potential implications of any regulatory changes to ensure the safety and soundness of the banking system. Stay tuned for updates on this developing story as the Fed navigates the challenging terrain of financial regulation in the coming months.
