Attachment SR 19-3 / CA letter 19-2

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Large Financial Institution Rating System

February 2019 [Fotne1

- See 83 Fed. Reg. 58724 (November 21, 2018) and 84 Fed. Reg. 4309 (February 15, 2019) for more information.

See also the Board’s press release dated November 2, 2018 available at

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181102a.htm. EndofFte 1.]

A. Overview

Each large financial institution (LFI) is expected to ensure that the consolidated 

organization (or the combined U.S. operations in the case of foreign banking organizations), 

including its critical operations and banking offices, remain safe and sound and in compliance

with laws and regulations, including those related to consumer protection. [Fotne2

- See SR letter 12-17/CA letter 12-14, “Consolidated Supervisory Framework for Large Financial Institutions,” at

http://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm.

Hereinafter, when “safe and sound” or “safety and soundness” is used in this framework, related expectations apply 

to the consolidated organization and the firm’s critical operations and banking offices.

“Critical operations” are a firm’s operations, including associated services, functions and support, the failure or 

discontinuance of which, in the view of the firm or the Federal Reserve, would pose a threat to the financial stability 

of the United States.

“Banking offices” are defined as U.S. depository institution subsidiaries, as well as the U.S. branches and agencies 

of foreign banking organizations. EndofFte 2.]

The LFI rating

system provides a supervisory evaluation of whether a covered firm possesses sufficient financial 

and operational strength and resilience to maintain safe-and-sound operations through a range of

conditions, including stressful ones. [Fotne3

- “Financial strength and resilience” is defined as maintaining effective capital and liquidity governance and

planning processes, and sufficiency of related positions, to provide for the continuity of the consolidated

organization (including its critical operations and banking offices) through a range of conditions.

“Operational strength and resilience” is defined as maintaining effective governance and controls to provide for the 

continuity of the consolidated organization (including its critical operations and banking offices) and to promote 

compliance with laws and regulations, including those related to consumer protection, through a range of conditions.

References to “financial or operational” weaknesses or deficiencies implicate a firm’s financial or operational 

strength and resilience. EndofFte 3.]

The LFI rating system applies to bank holding companies

with total consolidated assets of $100 billion or more; all non-insurance, non-commercial 

savings and loan holding companies with total consolidated assets of $100 billion or more; and 

U.S. intermediate holding companies of foreign banking organizations with combined U.S. 

assets of $50 billion or more established pursuant to the Federal Reserve’s Regulation YY. [Fotne4

- Total consolidated assets will be calculated based on the average of the firm’s total consolidated assets in the four

most recent quarters as reported on the firm’s quarterly financial reports filed with the Federal Reserve. A firm will

continue to be rated under the LFI rating system until it has less than $95 billion in total consolidated assets, based

on the average total consolidated assets as reported on the firm’s four most recent quarterly financial reports filed

with the Federal Reserve. The Federal Reserve may determine to apply the RFI rating system or another applicable

rating system in certain limited circumstances. EndofFte 4.]
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The LFI rating system is designed to:

• Fully align with the Federal Reserve’s current supervisory programs and practices, which 

are based upon the LFI supervision framework’s core objectives of reducing the 

probability of LFIs failing or experiencing material distress and reducing the risk to U.S. 

financial stability;

• Enhance the clarity and consistency of supervisory assessments and communications of 

supervisory findings and implications; and

• Provide transparency related to the supervisory consequences of a given rating.

The LFI rating system is comprised of three components:

• Capital Planning and Positions: an evaluation of (i) the effectiveness of a firm’s 

governance and planning processes used to determine the amount of capital necessary to 

cover risks and exposures, and to support activities through a range of conditions and 

events; and (ii) the sufficiency of a firm’s capital positions to comply with applicable 

regulatory requirements and to support the firm’s ability to continue to serve as a 

financial intermediary through a range of conditions.

• Liquidity Risk Management and Positions : an evaluation of (i) the effectiveness of a 

firm’s governance and risk management processes used to determine the amount of 

liquidity necessary to cover risks and exposures, and to support activities through a range 

of conditions; and (ii) the sufficiency of a firm’s liquidity positions to comply with 

applicable regulatory requirements and to support the firm’s ongoing obligations through 

a range of conditions.

• Governance and Controls: an evaluation of the effectiveness of a firm’s (i) board of

directors, [Fotne5

- References to “board” or “board of directors” in this framework includes the equivalent to a board of directors, as 

appropriate, as well as committees of the board of directors or the equivalent thereof, as appropriate.

At this time, recovery planning expectations only apply to domestic bank holding companies subject to the Federal 

Reserve’s LISCC supervisory framework. Should the Federal Reserve expand the scope of recovery planning 

expectations to encompass additional firms, this rating will reflect such expectations for the broader set of firms. EndofFte 5.]

(ii) management of business lines and independent risk management and

controls, [Fotne6

- The evaluation of the effectiveness of management of business lines would include management of critical 

operations. EndofFte 6.]

and (iii) recovery planning (only for domestic firms that are subject to the

Board’s Large Institution Supervision Coordinating Committee (LISCC) Framework). [Fotne7

- There are eight domestic firms in the LISCC portfolio: (1) Bank of America Corporation; (2) Bank of New York 

Mellon Corporation; (3) Citigroup, Inc.; (4) Goldman Sachs Group, Inc.; (5) JP Morgan Chase & Co.; (6) Morgan 

Stanley; (7) State Street Corporation; and (8) Wells Fargo & Company. In this guidance, these eight firms may 

collectively be referred to as “domestic LISCC firms.” EndofFte 7.]

This rating assesses a firm’s effectiveness in aligning strategic business objectives with 

the firm’s risk appetite and risk management capabilities; maintaining effective and 

independent risk management and control functions, including internal audit; promoting
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compliance with laws and regulations, including those related to consumer protection; 

and otherwise planning for the ongoing resiliency of the firm. [Fotne8

- “Risk appetite” is defined as the aggregate level and types of risk the board and senior management are willing to 

assume to achieve the firm’s strategic business objectives, consistent with applicable capital, liquidity, and other 

requirements and constraints. EndofFte 8.]

B. Assignment of the LFI Component Ratings

Each LFI component rating is assigned along a four-level scale:

• Broadly Meets Expectations: A firm’s practices and capabilities broadly meet 

supervisory expectations, and the firm possesses sufficient financial and operational 

strength and resilience to maintain safe-and-sound operations through a range of 

conditions. The firm may be subject to identified supervisory issues requiring corrective 

action. These issues are unlikely to present a threat to the firm’s ability to maintain safeand-sound operations through a range of conditions.

• Conditionally Meets Expectations: Certain, material financial or operational weaknesses 

in a firm’s practices or capabilities may place the firm’s prospects for remaining safe and 

sound through a range of conditions at risk if not resolved in a timely manner during the 

normal course of business.

The Federal Reserve does not intend for a firm to be assigned a “Conditionally Meets 

Expectations” rating for a prolonged period, and will work with the firm to develop an 

appropriate timeframe to fully resolve the issues leading to the rating assignment and 

merit upgrade to a “Broadly Meets Expectations” rating.

A firm is assigned a “Conditionally Meets Expectations” rating - as opposed to a 

“Deficient” rating - when it has the ability to resolve these issues through measures that 

do not require a material change to the firm’s business model or financial profile, or its 

governance, risk management or internal control structures or practices. Failure to 

resolve the issues in a timely manner would most likely result in the firm’s downgrade to 

a “Deficient” rating, since the inability to resolve the issues would indicate that the firm 

does not possess sufficient financial or operational capabilities to maintain its safety and 

soundness through a range of conditions.

It is recognized that completion and validation of remediation activities for select 

supervisory issues - such as those involving information technology modifications - may 

require an extended time horizon. In all instances, appropriate and effective risk 

mitigation techniques must be utilized in the interim to maintain safe-and-sound 

operations under a range of conditions until remediation activities are completed, 

validated, and fully operational.

• Deficient-1: Financial or operational deficiencies in a firm’s practices or capabilities put 

the firm’s prospects for remaining safe and sound through a range of conditions at 

significant risk. The firm is unable to remediate these deficiencies in the normal course 

of business, and remediation would typically require the firm to make a material change 

to its business model or financial profile, or its practices or capabilities.
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A firm’s failure to resolve the issues in a timely manner that gave rise to a “Conditionally 

Meets Expectations” rating would most likely result in its downgrade to a “Deficient” 

rating.

A firm with a “Deficient-1” rating is required to take timely corrective action to correct 

financial or operational deficiencies and to restore and maintain its safety and soundness 

and compliance with laws and regulations, including those related to consumer 

protection. There is a strong presumption that a firm with a “Deficient-1” rating will be 

subject to an informal or formal enforcement action, and this rating assignment could be 

a barrier for a firm seeking Federal Reserve approval to engage in new or expansionary 

activities.

• Deficient-2: Financial or operational deficiencies in a firm’s practices or capabilities 

present a threat to the firm’s safety and soundness, or have already put the firm in an 

unsafe and unsound condition.

A firm with a “Deficient-2” rating is required to immediately implement comprehensive 

corrective measures, and demonstrate the sufficiency of contingency planning in the 

event of further deterioration. There is a strong presumption that a firm with a 

“Deficient-2” rating will be subject to a formal enforcement action, and the Federal 

Reserve would be unlikely to approve any proposal from a firm with this rating to engage 

in new or expansionary activities.

The Federal Reserve will take into account a number of individual elements of a firm’s 

practices, capabilities and performance when making each component rating assignment. The 

weighting of an individual element in assigning a component rating will depend on its impact on 

the firm’s safety, soundness and resilience as provided for in the LFI rating system definitions. 

For example, for purposes of the Governance and Controls rating, a limited number of significant 

deficiencies - or even just one significant deficiency - noted for management of a single material 

business line could be viewed as sufficiently important to warrant a “Deficient-1” for the 

Governance and Controls component rating, even if the firm meets supervisory expectations 

under the Governance and Controls component in all other respects.

Under the LFI rating system, a firm must be rated “Broadly Meets Expectations” or 

“Conditionally Meets Expectations” for each of the three component ratings (Capital, Liquidity, 

Governance and Controls) to be considered “well managed” in accordance with various statutes

and regulations. [Fotne9

- 12 U.S.C. § 1841 et. seq. and 12 U.S.C. § 1461 et seq. See, eg., 12 CFR 225.4(b)(6), 225.14, 225.22(a), 225.23, 

225.85, and 225.86; 12 CFR 211.9(b), 211.10(a)(14), and 211.34; and 12 CFR 223.41. EndofFte 9.]

A “well managed” firm has sufficient financial and operational strength and

resilience to maintain safe-and-sound operations through a range of conditions, including 

stressful ones.
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C. LFI Rating Components

The LFI rating system is comprised of three component ratings: [Fotne10

- There may be instances where deficiencies or supervisory issues may be relevant to the Federal Reserve’s 

assessment of more than one component area. As such, the LFI rating will reflect these deficiencies or issues within 

multiple rating components when necessary to provide a comprehensive supervisory assessment. EndofFte 10.]

1. Capital Planning and Positions Component Rating

The Capital Planning and Positions component rating evaluates (i) the effectiveness of a 

firm’s governance and planning processes used to determine the amount of capital necessary to 

cover risks and exposures, and to support activities through a range of conditions; and (ii) the 

sufficiency of a firm’s capital positions to comply with applicable regulatory requirements and to 

support the firm’s ability to continue to serve as a financial intermediary through a range of 

conditions.

In developing this rating, the Federal Reserve evaluates:

• Capital Planning: The extent to which a firm maintains sound capital planning practices 

through effective governance and oversight; effective risk management and controls; 

maintenance of updated capital policies and contingency plans for addressing potential 

shortfalls; and incorporation of appropriately stressful conditions into capital planning 

and projections of capital positions; and

• Capital Positions: The extent to which a firm’s capital is sufficient to comply with 

regulatory requirements, and to support its ability to meet its obligations to depositors, 

creditors, and other counterparties and continue to serve as a financial intermediary 

through a range of conditions.

Definitions for the Capital Planning and Positions Component Rating

Broadly Meets Expectations

A firm’s capital planning and positions broadly meet supervisory expectations and 

support maintenance of safe-and-sound operations. Specifically:

• The firm is capable of producing sound assessments of capital adequacy through a range 

of conditions; and

• The firm’s current and projected capital positions comply with regulatory requirements, 

and support its ability to absorb current and potential losses, to meet obligations, and to 

continue to serve as a financial intermediary through a range of conditions.

A firm rated “Broadly Meets Expectations” may be subject to identified supervisory 

issues requiring corrective action. However, these issues are unlikely to present a threat to the 

firm’s ability to maintain safe-and-sound operations through a range of potentially stressful 

conditions.
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A firm that does not meet the capital planning and position expectations associated with a 

“Broadly Meets Expectations” rating will be rated “Conditionally Meets Expectations,” 

“Deficient-1,” or “Deficient-2,” and subject to potential consequences as outlined below.

Conditionally Meets Expectations

Certain, material financial or operational weaknesses in a firm’s capital planning or 

positions may place the firm’s prospects for remaining safe and sound through a range of 

conditions at risk if not resolved in a timely manner during the normal course of business.

Specifically, if left unresolved, these weaknesses:

• May threaten the firm’s ability to produce sound assessments of capital adequacy through 

a range of conditions; and/or

• May result in the firm’s projected capital positions being insufficient to absorb potential 

losses, comply with regulatory requirements, and support the firm’s ability to meet 

current and prospective obligations and to continue to serve as a financial intermediary 

through a range of conditions.

The Federal Reserve does not intend for a firm to be rated “Conditionally Meets 

Expectations” for a prolonged period. The firm has the ability to resolve these issues through 

measures that do not require a material change to the firm’s business model or financial profile, 

or its governance, risk management, or internal control structures or practices. The Federal 

Reserve will work with the firm to develop an appropriate timeframe during which the firm 

would be required to resolve each supervisory issue leading to the “Conditionally Meets 

Expectations” rating.

The Federal Reserve will closely monitor the firm’s remediation and mitigation activities; 

in most instances, the firm will either:

(i) Resolve the issues in a timely manner and, if no new material supervisory issues 

arise, be upgraded to a “Broadly Meets Expectations” rating because the firm’s 

capital planning practices and related positions would broadly meet supervisory 

expectations; or

(ii) Fail to resolve the issues in a timely manner and be downgraded to a “Deficient1” rating, because the inability to resolve the issues would indicate that the firm 

does not possess sufficient financial or operational capabilities to maintain its 

safety and soundness through a range of conditions.

It is possible that a firm may be close to completing resolution of the supervisory issues 

leading to the “Conditionally Meets Expectations” rating, but new issues are identified that, 

taken alone, would be consistent with a “Conditionally Meets Expectations” rating. In this 

event, the firm may continue to be rated “Conditionally Meets Expectations,” provided the new 

issues do not reflect a pattern of deeper or prolonged capital planning or position weaknesses 

consistent with a “Deficient” rating.

A “Conditionally Meets Expectations” rating may be assigned to a firm that meets the 

above definition regardless of its prior rating. A firm previously rated “Deficient-1” may be
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upgraded to “Conditionally Meets Expectations” if the firm’s remediation and mitigation 

activities are sufficiently advanced so that the firm’s prospects for remaining safe and sound are 

no longer at significant risk, even if the firm has outstanding supervisory issues or is subject to 

an active enforcement action.

Deficient-1

Financial or operational deficiencies in a firm’s capital planning or positions put the 

firm’s prospects for remaining safe and sound through a range of conditions at significant risk. 

The firm is unable to remediate these deficiencies in the normal course of business, and 

remediation would typically require a material change to the firm’s business model or financial 

profile, or its capital planning practices.

Specifically, although the firm’s current condition is not considered to be materially 

threatened:

• Deficiencies in the firm’s capital planning processes are not effectively mitigated. These 

deficiencies limit the firm’s ability to effectively assess capital adequacy through a range 

of conditions; and/or

• The firm’s projected capital positions may be insufficient to absorb potential losses and 

to support its ability to meet current and prospective obligations and serve as a financial 

intermediary through a range of conditions.

Supervisory issues that place the firm’s safety and soundness at significant risk, and 

where resolution is likely to require steps that clearly go beyond the normal course of business - 

such as issues requiring a material change to the firm’s business model or financial profile, or its 

governance, risk management or internal control structures or practices - would generally 

warrant assignment of a “Deficient-1” rating.

A “Deficient-1” rating may be assigned to a firm regardless of its prior rating. A firm 

previously rated “Broadly Meets Expectations” may be downgraded to “Deficient-1” when 

supervisory issues are identified that place the firm’s prospects for maintaining safe-and-sound 

operations through a range of potentially stressful conditions at significant risk. A firm 

previously rated “Conditionally Meets Expectations” may be downgraded to “Deficient-1” when 

the firm’s inability to resolve supervisory issues in a timely manner indicates that the firm does 

not possess sufficient financial or operational capabilities to maintain its safety and soundness 

through a range of conditions.

To address these financial or operational deficiencies, the firm is required to take timely 

corrective action to restore and maintain its capital planning and positions consistent with 

supervisory expectations. There is a strong presumption that a firm rated “Deficient-1” will be 

subject to an informal or formal enforcement action by the Federal Reserve.

A firm rated “Deficient-1” for any rating component would not be considered “well 

managed,” which would subject the firm to various consequences. A “Deficient-1” rating could 

be a barrier for a firm seeking Federal Reserve approval of a proposal to engage in new or 

expansionary activities, unless the firm can demonstrate that (i) it is making meaningful, 

sustained progress in resolving identified deficiencies and issues; (ii) the proposed new or
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expansionary activities would not present a risk of exacerbating current deficiencies or issues or 

lead to new concerns; and (iii) the proposed activities would not distract the firm from 

remediating current deficiencies or issues.

Deficient-2

Financial or operational deficiencies in a firm’s capital planning or positions present a 

threat to the firm’s safety and soundness, or have already put the firm in an unsafe and unsound 

condition.

Specifically, as a result of these deficiencies:

• The firm’s capital planning processes are insufficient to effectively assess the firm’s 

capital adequacy through a range of conditions; and/or

• The firm’s current or projected capital positions are insufficient to absorb current or 

potential losses, and to support the firm’s ability to meet current and prospective 

obligations and serve as a financial intermediary through a range of conditions.

To address these deficiencies, the firm is required to immediately (i) implement 

comprehensive corrective measures sufficient to restore and maintain appropriate capital 

planning capabilities and adequate capital positions; and (ii) demonstrate the sufficiency, 

credibility and readiness of contingency planning in the event of further deterioration of the 

firm’s financial or operational strength or resiliency. There is a strong presumption that a firm 

rated “Deficient-2” will be subject to a formal enforcement action by the Federal Reserve.

A firm rated “Deficient-2” for any rating component would not be considered “well 

managed,” which would subject the firm to various consequences. The Federal Reserve would 

be unlikely to approve any proposal from a firm rated “Deficient-2” to engage in new or 

expansionary activities.

2. Liquidity Risk Management and Positions Component Rating

The Liquidity Risk Management and Positions component rating evaluates (i) the 

effectiveness of a firm’s governance and risk management processes used to determine the 

amount of liquidity necessary to cover risks and exposures, and to support activities through a 

range of conditions; and (ii) the sufficiency of a firm’s liquidity positions to comply with 

applicable regulatory requirements and to support the firm’s ongoing obligations through a range 

of conditions.

In developing this rating, the Federal Reserve evaluates:

• Liquidity Risk Management: The extent to which a firm maintains sound liquidity risk 

management practices through effective governance and oversight; effective risk 

management and controls; maintenance of updated liquidity policies and contingency 

plans for addressing potential shortfalls; and incorporation of appropriately stressful 

conditions into liquidity planning and projections of liquidity positions; and

• Liquidity Positions: The extent to which a firm’s liquidity is sufficient to comply with 

regulatory requirements, and to support its ability to meet current and prospective
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obligations to depositors, creditors and other counterparties through a range of 

conditions.

Definitions for the Liquidity Risk Management and Positions Component Rating

Broadly Meets Expectations

A firm’s liquidity risk management and positions broadly meet supervisory expectations 

and support maintenance of safe-and-sound operations. Specifically:

• The firm is capable of producing sound assessments of liquidity adequacy through a 

range of conditions; and

• The firm’s current and projected liquidity positions comply with regulatory requirements, 

and support its ability to meet current and prospective obligations and to continue to 

serve as a financial intermediary through a range of conditions.

A firm rated “Broadly Meets Expectations” may be subject to identified supervisory 

issues requiring corrective action. However, these issues are unlikely to present a threat to the 

firm’s ability to maintain safe-and-sound operations through a range of potentially stressful 

conditions.

A firm that does not meet the liquidity risk management and position expectations 

associated with a “Broadly Meets Expectations” rating will be rated “Conditionally Meets 

Expectations,” “Deficient-1,” or “Deficient-2,” and subject to potential consequences as outlined 

below.

Conditionally Meets Expectations

Certain, material financial or operational weaknesses in a firm’s liquidity risk 

management or positions may place the firm’s prospects for remaining safe and sound through a 

range of conditions at risk if not resolved in a timely manner during the normal course of 

business.

Specifically, if left unresolved, these weaknesses:

• May threaten the firm’s ability to produce sound assessments of liquidity adequacy 

through a range of conditions; and/or

• May result in the firm’s projected liquidity positions being insufficient to comply with 

regulatory requirements, and support its ability to meet current and prospective 

obligations and to continue to serve as a financial intermediary through a range of 

conditions.

The Federal Reserve does not intend for a firm to be rated “Conditionally Meets 

Expectations” for a prolonged period. The firm has the ability to resolve these issues through 

measures that do not require a material change to the firm’s business model or financial profile, 

or its governance, risk management or internal control structures or practices. The Federal 

Reserve will work with the firm to develop an appropriate timeframe during which the firm 

would be required to resolve each supervisory issue leading to the “Conditionally Meets 

Expectations” rating.
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The Federal Reserve will closely monitor the firm’s remediation and mitigation activities; 

in most instances, the firm will either:

(i) Resolve the issues in a timely manner and, if no new material supervisory issues 

arise, and be upgraded to a “Broadly Meets Expectations” rating because the 

firm’s liquidity risk management practices and related positions would broadly 

meet supervisory expectations; or

(ii) Fail to resolve the issues in a timely manner and be downgraded to a “Deficient1” rating, because the firm’s inability to resolve those issues would indicate that 

the firm does not possess sufficient financial or operational capabilities to 

maintain its safety and soundness through a range of conditions.

It is possible that a firm may be close to completing resolution of the supervisory issues 

leading to the “Conditionally Meets Expectations” rating, but new issues are identified that, 

taken alone, would be consistent with a “Conditionally Meets Expectations” rating. In this 

event, the firm may continue to be rated “Conditionally Meets Expectations,” provided the new 

issues do not reflect a pattern of deeper or prolonged liquidity risk management and positions 

weaknesses consistent with a “Deficient” rating.

A “Conditionally Meets Expectations” rating may be assigned to a firm that meets the 

above definition regardless of its prior rating. A firm previously rated “Deficient-1” may be 

upgraded to “Conditionally Meets Expectations” if the firm’s remediation and mitigation 

activities are sufficiently advanced so that the firm’s prospects for remaining safe and sound are 

no longer at significant risk, even if the firm has outstanding supervisory issues or is subject to 

an active enforcement action.

Deficient-1

Financial or operational deficiencies in a firm’s liquidity risk management or positions 

put the firm’s prospects for remaining safe and sound through a range of conditions at significant 

risk. The firm is unable to remediate these deficiencies in the normal course of business, and 

remediation would typically require a material change to the firm’s business model or financial 

profile, or its liquidity risk management practices.

Specifically, although the firm’s current condition is not considered to be materially 

threatened:

• Deficiencies in the firm’s liquidity risk management processes are not effectively 

mitigated. These deficiencies limit the firm’s ability to effectively assess liquidity 

adequacy through a range of conditions; and/or

• The firm’s projected liquidity positions may be insufficient to support its ability to meet 

prospective obligations and serve as a financial intermediary through a range of 

conditions.

Supervisory issues that place the firm’s safety and soundness at significant risk, and 

where resolution is likely to require steps that clearly go beyond the normal course of business - 

such as issues requiring a material change to the firm’s business model or financial profile, or its
Page 11 of 15

governance, risk management or internal control structures or practices - would generally 

warrant assignment of a “Deficient-1” rating.

A “Deficient-1” rating may be assigned to a firm regardless of its prior rating. A firm 

previously rated “Broadly Meets Expectations” may be downgraded to “Deficient-1” when 

supervisory issues are identified that place the firm’s prospects for maintaining safe-and-sound 

operations through a range of potentially stressful conditions at significant risk. A firm 

previously rated “Conditionally Meets Expectations” may be downgraded to “Deficient-1” when 

the firm’s inability to resolve supervisory issues in a timely manner indicates that the firm does 

not possess sufficient financial or operational capabilities to maintain its safety and soundness 

through a range of conditions.

To address these financial or operational deficiencies, the firm is required to take timely 

corrective action to restore and maintain its liquidity risk management and positions consistent 

with supervisory expectations. There is a strong presumption that a firm rated “Deficient-1” will 

be subject to an informal or formal enforcement action by the Federal Reserve.

A firm rated “Deficient-1” for any rating component would not be considered “well 

managed,” which would subject the firm to various consequences. A “Deficient-1” rating could 

be a barrier for a firm seeking Federal Reserve approval of a proposal to engage in new or 

expansionary activities, unless the firm can demonstrate that (i) it is making meaningful, 

sustained progress in resolving identified deficiencies and issues; (ii) the proposed new or 

expansionary activities would not present a risk of exacerbating current deficiencies or issues or 

lead to new concerns; and (iii) the proposed activities would not distract the firm from 

remediating current deficiencies or issues.

Deficient-2

Financial or operational deficiencies in a firm’s liquidity risk management or positions 

present a threat to the firm’s safety and soundness, or have already put the firm in an unsafe and 

unsound condition.

Specifically, as a result of these deficiencies:

• The firm’s liquidity risk management processes are insufficient to effectively assess the

firm’s liquidity adequacy through a range of conditions; and/or

• The firm’s current or projected liquidity positions are insufficient to support the firm’s

ability to meet current and prospective obligations and serve as a financial intermediary

through a range of conditions.

To address these deficiencies, the firm is required to immediately (i) implement 

comprehensive corrective measures sufficient to restore and maintain appropriate liquidity risk 

management capabilities and adequate liquidity positions; and (ii) demonstrate the sufficiency, 

credibility and readiness of contingency planning in the event of further deterioration of the 

firm’s financial or operational strength or resiliency. There is a strong presumption that a firm 

rated “Deficient-2” will be subject to a formal enforcement action by the Federal Reserve.

A firm rated “Deficient-2” for any rating component would not be considered “well 

managed,” which would subject the firm to various consequences. The Federal Reserve would
Page 12 of 15

be unlikely to approve any proposal from a firm rated “Deficient-2” to engage in new or 

expansionary activities.

3. Governance and Controls Component Rating

The Governance and Controls component rating evaluates the effectiveness of a firm’s 

(i) board of directors, (ii) management of business lines and independent risk management and 

controls, and (iii) recovery planning (for domestic LISCC firms only). This rating assesses a 

firm’s effectiveness in aligning strategic business objectives with the firm’s risk appetite and risk 

management capabilities; maintaining effective and independent risk management and control 

functions, including internal audit; promoting compliance with laws and regulations, including 

those related to consumer protection; and otherwise providing for the ongoing resiliency of the 

firm.

In developing this rating, the Federal Reserve evaluates:

• Effectiveness of the Board of Directors : The extent to which the board exhibits attributes 

that are consistent with those of effective boards in carrying out its core roles and 

responsibilities, including: (i) setting a clear, aligned, and consistent direction regarding 

the firm’s strategy and risk appetite; (ii) directing senior management regarding the 

board’s information; (iii) overseeing and holding senior management accountable,

(iv) supporting the independence and stature of independent risk management and 

internal audit; and (v) maintaining a capable board composition and governance structure.

• Management of Business Lines and Independent Risk Management and Controls

The extent to which:

o Senior management effectively and prudently manages the day-to-day operations 

of the firm and provides for ongoing resiliency; implements the firm’s strategy 

and risk appetite; maintains an effective risk management framework and system 

of internal controls; and promotes prudent risk taking behaviors and business 

practices, including compliance with laws and regulations, including those related 

to consumer protection.

o Business line management executes business line activities consistent with the 

firm’s strategy and risk appetite; identifies and manages risks; and ensures an 

effective system of internal controls for its operations.

o Independent risk management effectively evaluates whether the firm’s risk

appetite appropriately captures material risks and is consistent with the firm’s risk 

management capacity; establishes and monitors risk limits that are consistent with 

the firm’s risk appetite; identifies and measures the firm’s risks; and aggregates, 

assesses and reports on the firm’s risk profile and positions. Additionally, the 

firm demonstrates that its internal controls are appropriate and tested for 

effectiveness. Finally, internal audit effectively and independently assesses the 

firm’s risk management framework and internal control systems, and reports 

findings to senior management and the firm’s audit committee.

• Recovery Planning (domestic LISCC firms only): The extent to which recovery planning 

processes effectively identify options that provide a reasonable chance of a firm being
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able to remedy financial weakness and restore market confidence without extraordinary 

official sector support.

Definitions for the Governance and Controls Component Rating

Broadly Meets Expectations

A firm’s governance and controls broadly meet supervisory expectations and support 

maintenance of safe-and-sound operations.

Specifically, the firm’s practices and capabilities are sufficient to align strategic business

objectives with its risk appetite and risk management capabilities, [Fotne11

- References to risk management capabilities includes risk management of business lines and independent risk 

management and control functions, including internal audit. EndofFte 1.]

maintain effective and

independent risk management and control functions, including internal audit; promote 

compliance with laws and regulations (including those related to consumer protection); and 

otherwise provide for the firm’s ongoing financial and operational resiliency through a range of 

conditions.

A firm rated “Broadly Meets Expectations” may be subject to identified supervisory 

issues requiring corrective action. However, these issues are unlikely to present a threat to the 

firm’s ability to maintain safe-and-sound operations through a range of potentially stressful 

conditions.

A firm that does not meet supervisory expectations associated with a “Broadly Meets 

Expectations” rating will be rated “Conditionally Meets Expectations,” “Deficient-1,” or 

“Deficient-2,” and subject to potential consequences, as outlined below.

Conditionally Meets Expectations

Certain, material financial or operational weaknesses in a firm’s governance and controls 

practices may place the firm’s prospects for remaining safe and sound through a range of 

conditions at risk if not resolved in a timely manner during the normal course of business.

Specifically, if left unresolved, these weaknesses may threaten the firm’s ability to align 

strategic business objectives with the firm’s risk appetite and risk management capabilities; 

maintain effective and independent risk management and control functions, including internal 

audit; promote compliance with laws and regulations (including those related to consumer 

protection); or otherwise provide for the firm’s ongoing resiliency through a range of conditions.

The Federal Reserve does not intend for a firm to be rated “Conditionally Meets 

Expectations” for a prolonged period. The firm has the ability to resolve these issues through 

measures that do not require a material change to the firm’s business model or financial profile, 

or its governance, risk management or internal control structures or practices. The Federal 

Reserve will work with the firm to develop an appropriate timeframe during which the firm 

would be required to resolve each supervisory issue leading to the “Conditionally Meets 

Expectations” rating.
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The Federal Reserve will closely monitor the firm’s remediation and mitigation activities; 

in most instances, the firm will either:

(i) Resolve the issues in a timely manner and, if no new material supervisory issues 

arise, be upgraded to a “Broadly Meets Expectations” rating because the firm’s 

governance and controls would broadly meet supervisory expectations; or

(ii) Fail to resolve the issues in a timely manner and be downgraded to a “Deficient1” rating, because the firm’s inability to resolve those issues would indicate that 

the firm does not possess sufficient financial or operational capabilities to 

maintain its safety and soundness through a range of conditions.

It is possible that a firm may be close to completing resolution of the supervisory issues 

leading to the “Conditionally Meets Expectations” rating, but new issues are identified that, 

taken alone, would be consistent with a “Conditionally Meets Expectations” rating. In this 

event, the firm may continue to be rated “Conditionally Meets Expectations,” provided the new 

issues do not reflect a pattern of deeper or prolonged governance and controls weaknesses 

consistent with a “Deficient” rating.

A “Conditionally Meets Expectations” rating may be assigned to a firm that meets the 

above definition regardless of its prior rating. A firm previously rated “Deficient” may be 

upgraded to “Conditionally Meets Expectations” if the firm’s remediation and mitigation 

activities are sufficiently advanced so that the firm’s prospects for remaining safe and sound are 

no longer at significant risk, even if the firm has outstanding supervisory issues or is subject to 

an active enforcement action.

Deficient-1

Financial or operational deficiencies in a firm’s governance and controls put the firm’s 

prospects for remaining safe and sound through a range of conditions at significant risk. The 

firm is unable to remediate these deficiencies in the normal course of business, and remediation 

would typically require a material change to the firm’s business model or financial profile, or its 

governance, risk management or internal control structures or practices.

Specifically, although the firm’s current condition is not considered to be materially 

threatened, these deficiencies limit the firm’s ability to align strategic business objectives with its 

risk appetite and risk management capabilities; maintain effective and independent risk 

management and control functions, including internal audit; promote compliance with laws and 

regulations (including those related to consumer protection); or otherwise provide for the firm’s 

ongoing resiliency through a range of conditions.

A “Deficient-1” rating may be assigned to a firm regardless of its prior rating. A firm 

previously rated “Broadly Meets Expectations” may be downgraded to “Deficient-1” when 

supervisory issues are identified that place the firm’s prospects for maintaining safe-and-sound 

operations through a range of potentially stressful conditions at significant risk. A firm 

previously rated “Conditionally Meets Expectations” may be downgraded to “Deficient-1” when 

the firm’s inability to resolve supervisory issues in a timely manner indicates that the firm does 

not possess sufficient financial or operational capabilities to maintain its safety and soundness 

through a range of conditions.
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To address these financial or operational deficiencies, the firm is required to take timely 

corrective action to restore and maintain its governance and controls consistent with supervisory 

expectations. There is a strong presumption that a firm rated “Deficient-1” will be subject to an 

informal or formal enforcement action by the Federal Reserve.

A firm rated “Deficient-1” for any rating component would not be considered “well 

managed,” which would subject the firm to various consequences. A “Deficient-1” rating could 

be a barrier for a firm seeking Federal Reserve approval of a proposal to engage in new or 

expansionary activities, unless the firm can demonstrate that (i) it is making meaningful, 

sustained progress in resolving identified deficiencies and issues; (ii) the proposed new or 

expansionary activities would not present a risk of exacerbating current deficiencies or issues or 

lead to new concerns; and (iii) the proposed activities would not distract the firm from 

remediating current deficiencies or issues.

Deficient-2

Financial or operational deficiencies in governance or controls present a threat to the 

firm’s safety and soundness, or have already put the firm in an unsafe and unsound condition. 

Specifically, as a result of these deficiencies, the firm is unable to align strategic business 

objectives with its risk appetite and risk management capabilities; maintain effective and 

independent risk management and control functions, including internal audit; promote 

compliance with laws and regulations (including those related to consumer protection); or 

otherwise provide for the firm’s ongoing resiliency.

To address these deficiencies, the firm is required to immediately (i) implement 

comprehensive corrective measures sufficient to restore and maintain appropriate governance 

and control capabilities; and (ii) demonstrate the sufficiency, credibility, and readiness of 

contingency planning in the event of further deterioration of the firm’s financial or operational 

strength or resiliency. There is a strong presumption that a firm rated “Deficient-2” will be 

subject to a formal enforcement action by the Federal Reserve.

A firm rated “Deficient-2” for any rating component would not be considered “well 

managed,” which would subject the firm to various consequences. The Federal Reserve would 

be unlikely to approve any proposal from a firm rated “Deficient-2” to engage in new or 

expansionary activities.