FED Consults on Corporate Governance and Large Entity Rating System

The proposal on corporate governance would refocus the FED's supervisory expectations for the largest firms' boards of directors on their core responsibilities, which will promote the safety and soundness of the firms. Boards' core responsibilities include oversight of the types and levels of risk a firm may take and aligning the firm's business strategy with those risk decisions. Additionally, the proposal would reduce unnecessary burden for the boards of smaller institutions. The corporate governance proposal is made up of three parts and it:

Identifies the attributes of effective boards of directors, such as setting a clear and consistent strategic direction for the firm, supporting independent risk management, and holding the management of the firm accountable (for the largest institutions, FED supervisors would use these attributes to inform their evaluation of a firm's governance and controls)

Clarifies that, for all supervised firms, most supervisory findings should be communicated to the firm's senior management for corrective action, rather than to its board of directors

Identifies existing supervisory expectations for boards of directors that could be eliminated or revised

The proposal on the rating system for large financial institutions system incorporates the regulatory and supervisory changes made by FED since 2012, which focus on capital, liquidity, and the effectiveness of governance and controls, including firms' compliance with laws and regulations. The current supervisory program for the largest firms was introduced in 2012 and sets higher standards to lower the probability of a firm's failure or material distress and to reduce risks to the U.S. financial stability. The proposed changes to the rating Supervisors would assess and assign confidential ratings in each of these categories. The proposed rating system would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with USD 50 billion or more in total consolidated assets as well as the intermediate holding companies of foreign banking organizations operating in the United States. Consistent with existing practice, the new rating system would not apply to insurance companies supervised by the Board. Firms with less than USD 50 billion in consolidated assets, including community banks, would continue to use the current rating system, which reflects long-standing supervisory practices for those firms.

Related Links

Proposal on Corporate Governance (PDF)

Proposal on Rating System (PDF)

Comment Due Date: October 01, 2017

Keywords: Americas, United States of America, Banking, Corporate Governance, Rating System, FED