Attachment Two: SR 19-4 / CA 19-3

Page 1 o f 25

RFI Rating System

(February 2019) [Fotne1

- With the adoption of the LFI rating system for holding companies with total consolidated assets of $100 billion or

more and the RFI rating system for non-insurance and non-commercial savings and loan holding companies with

less than $100 billion in total consolidated assets, the 2004 RFI rating system document has been revised to clarify

the applicability of the rating system and to provide current references to regulations and guidance. The elements of

the RFI rating system and the ratings’ definitions are unchanged. EndofFte 1.]

The RFI/C(D) rating system (referred to as the RFI rating system) provides an assessment 

of certain risk management and financial condition factors that are common to holding

companies, [Fotne2

- The RFI rating system applies to bank holding companies and non-insurance and non-commercial savings and loan

holding companies with less than $100 billion in total consolidated assets. However, U.S. intermediate holding

companies of foreign banking organizations established under the Board’s Regulation YY that have $50 billion or

more in total consolidated assets would not be subject to the RFI rating system. See 83 Fed. Reg. 58724

(November 21, 2018) and 84 Fed. Reg. 4309 (February 15, 2019) for more information. EndofFte 2.]

as well as an assessment of the potential impact of the parent holding company and

its nondepository subsidiaries (collectively, nondepository entities) on the holding company’s 

subsidiary depository institutions. Under this system, the Federal Reserve endeavors to ensure 

that applicable bank holding companies (BHCs), including financial holding companies (FHCs), 

and non-insurance and non-commercial savings and loan holding companies (SLHCs) are 

evaluated in a comprehensive and uniform manner, and that supervisory attention is 

appropriately focused on the holding companies that exhibit financial and operational 

weaknesses or adverse trends. The RFI rating system serves as a useful vehicle for identifying 

problem or deteriorating holding companies, as well as for categorizing holding companies with 

deficiencies in particular areas. Further, the RFI rating system assists the Federal Reserve in 

following safety and soundness trends and in assessing the aggregate strength and soundness of 

the financial industry.

Each holding company [Fotne3

- A simplified version of the rating system that includes only the R and C components will be applied to

noncomplex holding companies with assets at or below $3 billion. See SR letter 13-21, “Inspection Frequency and

Scope Requirements for Bank Holding Companies and Savings and Loan Holding Companies with Total

Consolidated Assets of $10 Billion or Less,” for more information. EndofFte 3.]

subject to the RFI rating system is assigned a composite rating

(C) based on an overall evaluation and rating of its managerial and financial condition and an

assessment of future potential risk to its subsidiary depository institution(s). The main

components of the rating system represent: Risk Management [Fotne4

- In 2004, this risk management rating replaced the risk management rating required for bank holding companies by

SR letter 95-51. “Rating the Adequacy of Risk Management Processes and Internal Controls at State Member Banks

and Bank Holding Companies.” EndofFte 4.]

(R); Financial Condition (F); and

Impact (I) of the nondepository entities on the subsidiary depository institutions. While the 

Federal Reserve expects holding companies to act as a source of strength to their subsidiary 

depository institutions, the Impact rating focuses on downside risk--that is, on the likelihood of 

significant negative impact by the nondepository entities on the subsidiary depository 

institution(s). A fourth rating, Depository Institution(s) (D), will generally mirror the primary
Page 2 o f 25

regulator’s assessment of the subsidiary depository institution(s). Thus, the primary component 

and composite ratings are displayed:

R F I / C (D)

In order to provide a consistent framework for assessing risk management, the R 

component is supported by four subcomponents that reflect the effectiveness of the 

organization’s risk management and controls. The subcomponents are: Board and Senior 

Management Oversight; Policies, Procedures, and Limits; Risk Monitoring and Management 

Information Systems; and Internal Controls. The F component is also supported by four 

subcomponents reflecting an assessment of the quality of the consolidated organization’s 

Capital; Asset Quality; Earnings; and Liquidity.

Composite, component, and subcomponent ratings are assigned based on a 1 to 5 numeric 

scale. A 1 numeric rating indicates the highest rating, strongest performance and practices, and 

least degree of supervisory concern, whereas a 5 numeric rating indicates the lowest rating, 

weakest performance, and the highest degree of supervisory concern.

The following three sections contain detailed descriptions of the composite, component, 

and subcomponent ratings, implementation guidance by holding company type, and definitions 

of the ratings.

I. Description of the RFI Rating System Elements

The Composite (C) Rating

C is the overall composite assessment of the holding company as reflected by 

consolidated risk management, consolidated financial strength, and the potential impact of the 

nondepository entities on the subsidiary depository institutions. The composite rating 

encompasses both a forward-looking and static assessment of the consolidated organization, as 

well as an assessment of the relationship between the depository and nondepository entities. The 

C rating is not derived as a simple numeric average of the R, F, and I components; rather, it 

reflects examiner judgment with respect to the relative importance of each component to the 

safe-and-sound operation of the holding company.

The Risk Management (R) Component

R represents an evaluation of the ability of the holding company’s board of directors and 

senior management, as appropriate for their respective positions, to identify, measure, monitor, 

and control risk. The R rating underscores the importance of the control environment, taking 

into consideration the complexity of the organization and the risk inherent in its activities.

The R rating is supported by four subcomponents that are each assigned a separate rating. 

The four subcomponents are as follows: 1) Board and Senior Management Oversight;

2) Policies, Procedures and Limits; 3) Risk Monitoring and Management Information Systems; 

and 4) Internal Controls. The subcomponents are evaluated in the context of the risks undertaken 

by and inherent in an organization and the overall level of complexity of the holding company’s 

operations. They provide the Federal Reserve with a consistent framework for evaluating risk
Page 3 o f 25

management and the control environment. Moreover, the subcomponents provide a clear 

structure and basis for discussion of the R rating with holding company management, reflect the

principles in supervisory guidance [Fotne5

- See SR letter 95-51, “Rating the Adequacy of Risk Management Processes and Internal Controls at State Member

Banks and Bank Holding Companies,” and SR letter 16-11, “Supervisory Guidance for Assessing Risk Management

at Supervised Institutions with Total Consolidated Assets Less than $50 Billion.” EndofFte 5.]

that are familiar to examiners, and parallel the existing risk

assessment process.

Risk Management Subcomponents [Fotne6

- SR letters 95-51 and 16-11 contain a detailed description of the four risk management subcomponents. EndofFte 6.]

Board and Senior Management Oversight [Fotne7

- The board of directors is considered separate from management. EndofFte 7.]

This subcomponent evaluates the adequacy and effectiveness of board and senior 

management’s understanding and management of risk inherent in the holding company’s 

activities, as well as the general capabilities of management. It also includes consideration of 

management’s ability to identify, understand, and control the risks undertaken by the institution, 

to hire competent staff, and to respond to changes in the institution’s risk profile or innovations 

in the banking sector.

Policies, Procedures and Limits

This subcomponent evaluates the adequacy of a holding company’s policies, procedures, 

and limits given the risks inherent in the activities of the consolidated organization and its stated 

goals and objectives. This analysis will include consideration of the adequacy of the institution’s 

accounting and risk disclosure policies and procedures.

Risk Monitoring and Management Information Systems

This subcomponent assesses the adequacy of a holding company’s risk measurement and 

monitoring, and the adequacy of its management reports and information systems. This analysis 

will include a review of the assumptions, data, and procedures used to measure risk and the 

consistency of these tools with the level of complexity of the organization’s activities.

Internal Controls

This subcomponent evaluates the adequacy of a holding company’s internal controls and 

internal audit procedures, including the accuracy of financial reporting and disclosure and the 

strength and influence, within the organization, of the internal audit team. This analysis will also 

include a review of the independence of control areas from management and the consistency of 

the scope coverage of the internal audit team with the complexity of the organization.

The Financial Condition (F) Component

F represents an evaluation of the consolidated organization’s financial strength. The F 

rating focuses on the ability of the holding company’s resources to support the level of risk
Page 4 of 25

associated with its activities. The F rating is supported by four subcomponents: capital (C), asset 

quality (A), earnings (E), and liquidity (L). The CAEL subcomponents can be evaluated along 

individual business lines, product lines, or on a legal entity basis, depending on what is most 

appropriate given the structure of the organization. The assessment of the CAEL components 

should utilize benchmarks and metrics appropriate to the business activity being evaluated.

Examination staff should continue to review relevant market indicators, such as external 

debt ratings, credit spreads, debt and equity prices, and qualitative rating agency assessments as a 

source of information complementary to examination findings.

Financial Condition Subcomponents (CAEL)

Capital Adequacy

C reflects the adequacy of an organization’s consolidated capital position, from a 

regulatory capital perspective and an economic capital perspective, as appropriate to the holding

company. [Fotne8

 The regulatory minimum capital ratios for covered holding companies subject to the Board’s Regulation Q 

(12 CFR 217) are (1) a common equity tier 1 capital ratio of 4.5 percent; (2) a tier 1 capital ratio of 6 percent; (3) a 

total capital ratio of 8 percent; (4) a leverage ratio of 4 percent, and (5) for advanced approaches Board-regulated 

institutions, a supplementary leverage ratio of 3 percent. End ofFte8.]

The evaluation of capital adequacy should consider the risk inherent in an

organization’s activities and the ability of capital to absorb unanticipated losses, to provide a 

base for growth, and to support the level and composition of the parent company and 

subsidiaries’ debt.

Asset Quality

A reflects the quality of an organization’s consolidated assets. The evaluation should 

include, as appropriate, both on-balance sheet and off-balance sheet exposures, and the level of 

criticized and nonperforming assets. Forward-looking indicators of asset quality, such as the 

adequacy of underwriting standards, the level of concentration risk, the adequacy of credit 

administration policies and procedures, and the adequacy of management information systems 

for credit risk may also inform the Federal Reserve’s view of asset quality.

Earnings

E reflects the quality of consolidated earnings. The evaluation considers the level, trend, 

and sources of earnings, as well as the ability of earnings to augment capital as necessary, to 

provide ongoing support for a holding company’s activities.

Liquidity

L reflects the consolidated organization’s ability to attract and maintain the sources of 

funds necessary to support its operations and meet its obligations. The funding conditions for 

each of the material legal entities in the holding company structure should be evaluated to 

determine if any weaknesses exist that could affect the funding profile of the consolidated 

organization.
Page 5 o f 25

The Impact (I) Component

Like the other components and subcomponents, the I component is rated on a five point 

numerical scale. However, the descriptive definitions of the numerical ratings for I are different 

than those of the other components and subcomponents. The I ratings are defined as follows:

1 - low likelihood of significant negative impact;

2 - limited likelihood of significant negative impact;

3 - moderate likelihood of significant negative impact;

4 - considerable likelihood of significant negative impact; and

5 - high likelihood of significant negative impact.

The I component is an assessment of the potential impact of the nondepository entities on 

the subsidiary depository institution(s). The I assessment will evaluate both the risk management 

practices and financial condition of the nondepository entities--an analysis that will borrow 

heavily from the analysis conducted for the R and F components. Nondepository entities will be 

evaluated using benchmarks and analysis appropriate for those businesses. In addition, for 

functionally regulated nondepository subsidiaries, examination staff will continue to rely, to the 

extent possible, on the work of those functional regulators to assess the risk management 

practices and financial condition of those entities. In rating the I component, examination staff is 

required to evaluate the degree to which current or potential issues within the nondepository 

entities present a threat to the safety and soundness of the subsidiary depository institution(s).

The I component focuses on the aggregate impact of the nondepository entities on the 

subsidiary depository institution(s). In this regard, the I rating does not include individual 

subcomponent ratings for the parent company and nondepository subsidiaries. An I rating is 

always assigned for each holding company; however, nonmaterial nondepository subsidiaries [Fotne9

- In general, nondepository subsidiaries should be included in the I analysis whenever their assets exceed five 

percent of the holding company’s consolidated capital or $10 million, whichever is lower. EndofFte 9.]

may be excluded from the I analysis at examiner discretion.

Any risk management and financial issues at the nondepository entities that potentially 

impact the safety and soundness of the subsidiary depository institution(s) should be identified in 

the written comments under the I rating. This approach is consistent with the Federal Reserve’s 

objective not to extend bank-like supervision to nondepository entities.

The analysis of the parent company for the purpose of assigning an I rating should 

emphasize weaknesses that could directly impact the risk management or financial condition of 

the subsidiary depository institution(s). Similarly, the analysis of the nondepository subsidiaries 

for the purpose of assigning an I rating should emphasize weaknesses that could negatively 

impact the parent company’s relationship with its subsidiary depository institution(s) and 

weaknesses that could have a direct impact on the risk management practices or financial 

condition of the subsidiary depository institution(s). The analysis under the I component should
Page 6 of 25

consider existing as well as potential issues and risks that may impact the subsidiary depository 

institution(s) now or in the future. Particular attention should be paid to the following risk 

management and financial factors in assigning the I rating:

Risk Management Factors

• Strategic Considerations: The potential risks posed to the subsidiary depository 

institution(s) by the nondepository entities’ strategic plans for growth in existing 

activities and expansion into new products and services;

• Operational Considerations: The spillover impact on the subsidiary depository 

institution(s) from actual losses, a poor control environment, or an operational loss 

history in the nondepository entities;

• Legal and Reputational Considerations: The spillover effect on the subsidiary depository 

institution(s) of complaints and litigation that name one or more of the nondepository 

entities as defendants, or violations of laws or regulations, especially pertaining to 

intercompany transactions where the subsidiary depository institution(s) is involved; and

• Concentration Considerations: The potential risks posed to the subsidiary depository 

institution(s) by concentrations within the nondepository entities in business lines, 

geographic areas, industries, customers, or other factors.

Financial Factors

• Capital Distribution: The distribution and transferability of capital across the legal 

entities;

• Intra-Group Exposures: The extent to which intra-group exposures, including servicing 

agreements, have the potential to undermine the condition of subsidiary depository 

institution(s); and

• Parent Company Cash Flow and Leverage : The extent to which the parent company is 

dependent on dividend payments, from both the nondepository subsidiaries and the 

subsidiary depository institution(s), to service debt and cover fixed charges. Also, the 

effect that these upstreamed cash flows have had, or can be expected to have, on the 

financial condition of the holding company’s nondepository subsidiaries and subsidiary 

depository institution(s).

The Depository Institution(s) (D) Component

The (D) component will generally reflect the composite CAMELS rating assigned by the 

subsidiary depository institution’s primary supervisor. In a multi-depository institution holding 

company , the (D) rating will reflect a weighted average of the CAMELS composite ratings of 

the individual subsidiary depository institutions, weighted by both asset size and the relative 

importance of each depository institution within the holding company structure. In this regard, 

the CAMELS composite rating for a subsidiary depository institution that dominates the 

corporate culture may figure more prominently in the assignment of the (D) rating than would be 

dictated by asset size, particularly when problems exist within that depository institution.
Page 7 o f 25

The (D) component conveys important supervisory information, reflecting the primary 

supervisor’s assessment of the legal entity. The (D) component stands outside of the composite 

rating although significant risk management and financial condition considerations at the 

depository institution level are incorporated in the consolidated R and F ratings, which are then 

factored into the C rating.

In the process of analyzing the financial condition and risk management programs of the 

consolidated organization, a major difference of opinion regarding the safety and soundness of 

the subsidiary depository institution(s) emerges between the Federal Reserve and the depository 

institution’s primary regulator, then the (D) rating should reflect the Federal Reserve’s 

evaluation.

To highlight the presence of one or more problem depository institution(s) in a multidepository institution holding company whose depository institution component, based on 

weighted averages, might not otherwise reveal their presence (i.e., depository institution ratings 

of 1, 2 or 3), a problem modifier, “P” would be attached to the depository institution rating (e.g., 

1P, 2P, or 3P). Thus, 2P would indicate that, while on balance the depository subsidiaries are 

rated satisfactory, there exists a problem depository institution (composite 4 or 5) among the 

subsidiary depository institutions. The problem identifier is unnecessary when the depository 

institution component is rated 4 or 5.

II. Implementation of the RFI Rating System by Holding Company Type

Since 2004, the Federal Reserve has used the RFI rating system to communicate its 

supervisory assessment of BHCs regardless of their asset size, complexity, or systemic 

importance. In 2018, the Board adopted the RFI rating system for non-insurance and noncommercial SLHCs with less than $100 billion in total consolidated assets. The scope and 

frequency of inspections of holding companies under the RFI rating system will vary based upon

whether a holding company has been determined to be “complex” or “noncomplex.” [Fotne10

- The determination of whether a holding company is “complex” versus “noncomplex” is made at least annually on 

a case-by-case basis taking into account and weighing a number of considerations, such as: the size and structure of 

the holding company; the extent of intercompany transactions between depository institution subsidiaries and the 

holding company or nondepository subsidiaries of the holding company; the nature and scale of any nondepository 

activities, including whether the activities are subject to review by another regulator and the extent to which the 

holding company is conducting Gramm-Leach-Bliley authorized activities (e.g., insurance, securities, merchant 

banking); whether risk management processes for the holding company are consolidated; and whether the holding 

company has material debt outstanding to the public. Size is a less important determinant of complexity than many 

of the factors noted above. EndofFte 10.]

In

addition, the resources dedicated to the inspection of each holding company will continue to be 

determined by the risk posed by the subsidiary depository institution(s) to the federal safety net [Fotne11

- The federal safety net includes the federal deposit insurance fund, the payments system, and the Federal Reserve’s 

discount window. EndofFte 1.]

and the risk posed by the holding company to the subsidiary depository institution(s).

Noncomplex Holding Companies with Assets of $3 Billion or Less (Shell Holding

Companies) Rating: R and C
Page 8 of 25

Examination staff will assign only an R and C rating for all noncomplex holding

companies with assets under $3 billion. [Fotne12

- Refer to SR letter 13-21, “Inspection Frequency and Scope Requirements for Bank Holding Companies and 

Savings and Loan Holding Companies with Total Consolidated Assets of $10 Billion or Less.” EndofFte 12.]

The R rating is the M rating from the subsidiary

depository institution’s CAMELS rating. The C rating is the subsidiary depository institution’s 

composite CAMELS rating.

Noncomplex Holding Companies with Assets Greater than $3 Billion

One-Depository Institution Holding Company Rating: RFI/C (D)

For all noncomplex, one-depository institution holding companies with assets of greater 

than $3 billion, examination staff will assign all component and subcomponent ratings; however, 

examination staff should rely heavily on information and analysis contained in the primary 

regulator’s report of examination for the subsidiary depository institution to assign the R and F 

ratings. If examination staff have reviewed the primary regulator’s examination report and are 

comfortable with the analysis and conclusions contained in that report, then the holding company 

ratings should be supported with concise language that indicates that the conclusions are based 

on the analysis of the primary regulator. No additional analysis will be required.

Please note, however, in cases where the analysis and conclusions of the primary 

regulator are insufficient to assign the ratings, the primary regulator should be contacted to 

ascertain whether additional analysis and support may be available. Further, if discussions with 

the primary regulator do not provide sufficient information to assign the ratings, discussions with 

holding company management may be warranted to obtain adequate information to assign the 

ratings. In most cases, additional information or support obtained through these steps will be 

sufficient to permit the assignment of the R and F ratings. To the extent that additional analysis 

is deemed necessary, the level of analysis and resources spent on this assessment should be in 

line with the level of risk the subsidiary depository institution poses to the federal safety net. In 

addition, any activities that involve information gathering with respect to the subsidiary 

depository institution should be coordinated with and, if possible, conducted by, the primary 

regulator of that institution.

Examination staff are required to make an independent assessment in order to assign the I 

rating, which provides an evaluation of the impact of the holding company on the subsidiary 

depository institution. Analysis for the I rating in non-complex one-depository institution 

holding companies should place particular emphasis on issues related to parent company cash 

flow and compliance with sections 23A and 23B of the Federal Reserve Act.

Multi-Depository Institution Holding Company Rating: RFI/C (D)

For all noncomplex holding companies with assets of greater than $3 billion and more 

than one subsidiary depository institution, examination staff will assign all component and 

subcomponent ratings of the RFI rating system. Examiners should rely, to the extent possible, on 

the work conducted by the primary regulators of the subsidiary depository institutions to assign 

the R and F ratings. However, any risk management or other important functions conducted by
Page 9 of 25

the nondepository entities of the holding company, or conducted across legal entity lines, should 

be subject to review by Federal Reserve examination staff. These reviews should be conducted 

in coordination with the primary regulator(s). The assessment for the I rating requires an 

independent assessment by Federal Reserve examination staff.

Complex Holding Companies Rating: RFI/C (D)

For complex holding companies, examination staff will assign all component and 

subcomponent ratings of the RFI rating system. The ratings analysis should be based on the 

primary and functional regulators’ assessment of the subsidiary entities, as well as on the 

examiners’ assessment of the consolidated organization as determined through off-site review 

and the holding company inspection process, as appropriate. The resources needed for the 

inspection and the level of support needed for developing a full rating will depend on the 

complexity of the organization, including structure and activities, and should be commensurate 

with the level of risk posed by the subsidiary depository institution(s) to the federal safety net 

and the level of risk posed by the holding company to the subsidiary depository institution(s).

Nontraditional Holding Companies Rating: RFI/C (D)

Examination staff are required to assign the full rating system for nontraditional holding 

companies. Nontraditional holding companies include holding companies in which most or all 

nondepository entities are regulated by a functional regulator and in which the subsidiary

depository institution(s) are small in relation to the nondepository entities [Fotne13

- SLHCs that derive 50 percent or more of their total consolidated assets or total revenues from activities that are 

not financial in nature under section 4(k) of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 

1843(k)) (commercial SLHCs), and SLHCs that are insurance companies or hold 25 percent or more of their total 

consolidated assets in subsidiaries that are insurance companies (insurance SLHCs) will receive an “indicative” RFI 

rating regardless of size. EndofFte 13.]

. The rating system is

not intended to introduce significant additional work in the rating process for these organizations. 

As discussed above, the level of analysis conducted and resources needed to inspect the holding 

company and to assign the consolidated R and F ratings should be commensurate with the level 

of risk posed by the subsidiary depository institution(s) to the federal safety net and the level of 

risk posed by the holding company to the subsidiary depository institution(s). The report of 

examination by, and other information obtained from, the functional and primary bank regulators 

should provide the basis for the consolidated R and F ratings. On-site work, to the extent it 

involves areas that are the primary responsibility of the functional or primary depository 

institution(s) regulator, should be coordinated with and, if possible, conducted by, those 

regulators. Examination staff should concentrate their independent analysis for the R and F 

ratings around activities and risk management conducted by the parent company and nonfunctionally regulated nondepository subsidiaries, as well as around activities and risk 

management functions that are related to the subsidiary depository institution(s), for example, 

audit functions for the depository institution(s) and compliance with sections 23A and 23B.

Examination staff are required to make an independent assessment of the impact of the 

nondepository entities on the subsidiary depository institution(s) in order to assign the I rating.
Page 10 of 25

III. Rating Definitions for the RFI/C (D) Rating System

All component and subcomponent ratings are rated on a five point numeric scale. With the 

exception of the I component, ratings will be assigned in ascending order of supervisory concern 

as follows:

1 - Strong; 2 - Satisfactory; 3 - Fair; 4 - Marginal; and 5 - Unsatisfactory.

A description of the I component ratings is in the I section below.

The component ratings are not derived as a simple numeric average of the subcomponent 

ratings; rather, weight afforded to each subcomponent in the overall component rating will 

depend on the severity of the condition of that subcomponent and the relative importance of that 

subcomponent to the consolidated organization. Similarly, some components may be given more 

weight than others in determining the composite rating, depending on the situation of the holding 

company. Assignment of a composite rating may incorporate any factor that bears significantly 

on the overall condition and soundness of the holding company, although generally the 

composite rating bears a close relationship to the component ratings assigned.

Composite Rating

Rating 1 (Strong). Holding companies in this group are sound in almost every respect; any 

negative findings are basically of a minor nature and can be handled in a routine manner. Risk 

management practices and financial condition provide resistance to external economic and 

financial disturbances. Cash flow is more than adequate to service debt and other fixed 

obligations, and the nondepository entities pose little risk to the subsidiary depository 

institution(s).

Rating 2 (Satisfactory). Holding companies in this group are fundamentally sound but may have 

modest weaknesses in risk management practices or financial condition. The weaknesses could 

develop into conditions of greater concern but are believed correctable in the normal course of 

business. As such, the supervisory response is limited. Cash flow is adequate to service 

obligations, and the nondepository entities are unlikely to have a significant negative impact on 

the subsidiary depository institution(s).

Rating 3 (Fair). Holding companies in this group exhibit a combination of weaknesses in risk 

management practices and financial condition that range from fair to moderately severe. These 

companies are less resistant to the onset of adverse business conditions and would likely 

deteriorate if concerted action is not effective in correcting the areas of weakness. Consequently, 

these companies are vulnerable and require more than normal supervisory attention and financial 

surveillance. However, the risk management and financial capacity of the company, including 

the potential negative impact of the nondepository entities on the subsidiary depository 

institution(s), pose only a remote threat to its continued viability.

Rating 4 (Marginal) . Holding companies in this group have an immoderate volume of risk 

management and financial weaknesses, which may pose a heightened risk of significant negative 

impact on the subsidiary depository institution(s). The holding company’s cash flow needs may
Page 11 of 25

be being met only by upstreaming imprudent dividends and/or fees from its subsidiaries. Unless 

prompt action is taken to correct these conditions, the organization’s future viability could be 

impaired. These companies require close supervisory attention and substantially increased 

financial surveillance.

Rating 5 (Unsatisfactory) . The critical volume and character of the risk management and 

financial weaknesses of holding companies in this category, and concerns about the 

nondepository entities negatively impacting the subsidiary depository institution(s), could lead to 

insolvency without urgent aid from shareholders or other sources. The imminent inability to 

prevent liquidity and/or capital depletion places the holding company’s continued viability in 

serious doubt. These companies require immediate corrective action and constant supervisory 

attention.

Risk Management Component

Rating 1 (Strong). A rating of 1 indicates that management effectively identifies and controls all 

major types of risk posed by the holding company’s activities. Management is fully prepared to 

address risks emanating from new products and changing market conditions. The board and 

management are forward-looking and active participants in managing risk. Management ensures 

that appropriate policies and limits exist and are understood, reviewed, and approved by the 

board. Policies and limits are supported by risk monitoring procedures, reports, and management 

information systems that provide management and the board with the information and analysis 

that is necessary to make timely and appropriate decisions in response to changing conditions. 

Risk management practices and the organization’s infrastructure are flexible and highly 

responsive to changing industry practices and current regulatory guidance. Staff has sufficient 

experience, expertise and depth to manage the risks assumed by the institution.

Internal controls and audit procedures are sufficiently comprehensive and appropriate to 

the size and activities of the institution. There are few noted exceptions to the institution’s 

established policies and procedures, and none are material. Management effectively and 

accurately monitors the condition of the institution consistent with the standards of safety and 

soundness, and in accordance with internal and supervisory policies and practices. Risk 

management processes are fully effective in identifying, monitoring, and controlling the risks to 

the institution.

Rating 2 (Satisfactory). A rating of 2 indicates that the institution's management of risk is largely 

effective, but lacking in some modest degree. Management demonstrates a responsiveness and 

ability to cope successfully with existing and foreseeable risks that may arise in carrying out the 

institution’s business plan. While the institution may have some minor risk management 

weaknesses, these problems have been recognized and are in the process of being resolved. 

Overall, board and senior management oversight, policies and limits, risk monitoring procedures, 

reports, and management information systems are considered satisfactory and effective in 

maintaining a safe and sound institution. Risks are controlled in a manner that does not require 

more than normal supervisory attention.
Page 12 of 25

The holding company’s risk management practices and infrastructure are satisfactory and 

generally are adjusted appropriately in response to changing industry practices and current 

regulatory guidance. Staff experience, expertise and depth are generally appropriate to manage 

the risks assumed by the institution.

Internal controls may display modest weaknesses or deficiencies, but they are correctable 

in the normal course of business. The examiner may have recommendations for improvement, 

but the weaknesses noted should not have a significant effect on the safety and soundness of the 

institution.

Rating 3 (Fair). A rating of 3 signifies that risk management practices are lacking in some 

important ways and, therefore, are a cause for more than normal supervisory attention. One or

more of the four elements of sound risk management [Fotne14

- See SR letter 95-51, “Rating the Adequacy of Risk Management Processes and Internal Controls at State Member 

Banks and Bank Holding Companies,” and SR letter 16-11, “Supervisory Guidance for Assessing Risk Management 

at Supervised Institutions with Total Consolidated Assets Less than $50 Billion.” EndofFte 14.]

(active board and senior management

oversight; adequate policies, procedures, and limits; adequate risk management monitoring and 

management information systems; comprehensive internal controls) is considered less than 

acceptable, and has precluded the institution from fully addressing one or more significant risks 

to its operations. Certain risk management practices are in need of improvement to ensure that 

management and the board are able to identify, monitor, and control all significant risks to the 

institution. Also, the risk management structure may need to be improved in areas of significant 

business activity, or staff expertise may not be commensurate with the scope and complexity of 

business activities. In addition, management’s response to changing industry practices and 

regulatory guidance may need to improve.

The internal control system may be lacking in some important aspects, particularly as 

indicated by continued control exceptions or by a failure to adhere to written policies and 

procedures. The risk management weaknesses could have adverse effects on the safety and 

soundness of the institution if corrective action is not taken by management.

Rating 4 (Marginal). A rating of 4 represents deficient risk management practices that fail to 

identify, monitor, and control significant risk exposures in many material respects. Generally, 

such a situation reflects a lack of adequate guidance and supervision by management and the 

board. One or more of the four elements of sound risk management is deficient and requires 

immediate and concerted corrective action by the board and management.

The institution may have serious identified weaknesses, such as an inadequate separation 

of duties, that require substantial improvement in internal control or accounting procedures, or 

improved adherence to supervisory standards or requirements. The risk management 

deficiencies warrant a high degree of supervisory attention because, unless properly addressed, 

they could seriously affect the safety and soundness of the institution.

Rating 5 (Unsatisfactory) . A rating of 5 indicates a critical absence of effective risk management 

practices with respect to the identification, monitoring, or control over significant risk exposures.
Page 13 of 25

One or more of the four elements of sound risk management is considered wholly deficient, and 

management and the board have not demonstrated the capability to address these deficiencies.

Internal controls are critically weak and, as such, could seriously jeopardize the continued 

viability of the institution. If not already evident, there is an immediate concern as to the 

reliability of accounting records and regulatory reports and the potential for losses if corrective 

measures are not taken immediately. Deficiencies in the institution's risk management 

procedures and internal controls require immediate and close supervisory attention.

Risk Management Subcomponents

Board and Senior Management Oversight

Rating 1 (Strong). An assessment of Strong signifies that the board and senior management are 

forward-looking, fully understand the types of risk inherent in the holding company’s activities, 

and actively participate in managing those risks. The board has approved overall business 

strategies and significant policies, and ensures that senior management is fully capable of 

managing the activities that the holding company conducts. Consistent with the standards of 

safety and soundness, oversight of risk management practices is strong and the organization’s 

overall business strategy is effective.

Senior management ensures that risk management practices are rapidly adjusted in 

accordance with enhancements to industry practices and regulatory guidance, and exposure 

limits are adjusted as necessary to reflect the institution’s changing risk profile. Policies, limits, 

and tracking reports are appropriate, understood, and regularly reviewed.

Management provides effective supervision of the day-to-day activities of all officers and 

employees, including the supervision of the senior officers and the heads of business lines. It 

hires staff that possess experience and expertise consistent with the scope and complexity of the 

organization’s business activities. There is a sufficient depth of staff to ensure sound operations. 

Management ensures compliance with laws and regulations and that employees have the 

integrity, ethical values, and competence consistent with a prudent management philosophy and 

operating style.

Management responds appropriately to changes in the marketplace. It identifies all risks 

associated with new activities or products before they are launched, and ensures that the 

appropriate infrastructure and internal controls are established.

Rating 2 (Satisfactory). An assessment of Satisfactory indicates that board and senior 

management have an adequate understanding of the organization’s risk profile and provide 

largely effective oversight of risk management practices. In this regard, the board has approved 

all major business strategies and significant policies, and ensures that senior management is 

capable of managing the activities that the holding company conducts. Oversight of risk 

management practices is satisfactory and the organization’s overall business strategy is generally 

sound.
Page 14 of 25

Senior management generally adjusts risk management practices appropriately in 

accordance with enhancements to industry practices and regulatory guidance, and adjusts 

exposure limits as necessary to reflect the institution’s changing risk profile, although these 

practices may be lacking in some modest degree. Policies, limits, and tracking reports are 

generally appropriate, understood, and regularly reviewed, and the new product approval process 

adequately identifies the associated risks and necessary controls.

Senior management’s day-to-day supervision of management and staff at all levels is 

generally effective. The level of staffing, and its experience, expertise, and depth, is sufficient to 

operate the business lines in a safe and sound manner. Minor weaknesses may exist in the 

staffing, infrastructure, and risk management processes for individual business lines or products, 

but these weaknesses have been identified by management, are correctable in the normal course 

of business, and are in the process of being addressed. Weaknesses noted should not have a 

significant effect on the safety and soundness of the institution.

Rating 3 (Fair). An assessment of Fair signifies that board and senior management oversight is 

lacking in some important way and, therefore, is a cause for more than normal supervisory 

attention. The weaknesses may involve a broad range of activities or be material to a major 

business line or activity. Weaknesses in one or more aspect of board and senior management 

oversight have precluded the institution from fully addressing one or more significant risks to the 

institution. The deficiencies may include a lack of knowledge with respect to the organization’s 

risk profile, insufficient oversight of risk management practices, ineffective policies or limits, 

inadequate or under-utilized management reporting, an inability to respond to industry 

enhancements and changes in regulatory guidance, or failure to execute appropriate business 

strategies. Staffing may not be adequate or staff may not possess the experience and expertise 

needed for the scope and complexity of the organization’s business activities. The day-to-day 

supervision of officer and staff activities, including the management of senior officers or heads 

of business lines, may be lacking. Certain risk management practices are in need of 

improvement to ensure that management and the board is able to identify, monitor, and control 

all significant risks to the institution. Weaknesses noted could have adverse effects on the safety 

and soundness of the institution if corrective action is not taken by management.

Rating 4 (Marginal). An assessment of Marginal represents deficient oversight practices that 

reflect a lack of adequate guidance and supervision by management and the board. A number of 

significant risks to the institution have not been adequately addressed, and the board and senior 

management function warrants a high degree of supervisory attention. Multiple board and senior 

management weaknesses are in need of immediate improvement. They may include a significant 

lack of knowledge with respect to the organization’s risk profile, largely insufficient oversight of 

risk management practices, ineffective policies or limits, inadequate or considerably underutilized management reporting, an inability to respond to industry enhancements and changes in 

regulatory guidance, or failure to execute appropriate business strategies. Staffing may not be 

adequate or possess the experience and expertise needed for the scope and complexity of the 

organization’s business activities, and the day-to-day supervision of officer and staff activities, 

including the management of senior officers or heads of business lines, may be considerably
Page 15 of 25

lacking. These conditions warrant a high degree of supervisory attention because, unless 

properly addressed, they could seriously affect the safety and soundness of the institution.

Rating 5 (Unsatisfactory). An assessment of Unsatisfactory indicates a critical absence of 

effective board and senior management oversight practices. Problems may include a severe lack 

of knowledge with respect to the organization’s risk profile, insufficient oversight of risk 

management practices, wholly ineffective policies or limits, critically inadequate or underutilized management reporting, a complete inability to respond to industry enhancements and 

changes in regulatory guidance, or failure to execute appropriate business strategies. Staffing 

may be inadequate, inexpert, and/or inadequately supervised. The deficiencies require 

immediate and close supervisory attention, as management and the board have not demonstrated 

the capability to address them. Weaknesses could seriously jeopardize the continued viability of 

the institution.

Policies, Procedures and Limits

Rating 1 (Strong). An assessment of Strong indicates that the policies, procedures, and limits 

provide for effective identification, measurement, monitoring, and control of the risks posed by 

all significant activities, including lending, investing, trading, trust, and fiduciary activities. 

Policies, procedures, and limits are consistent with the institution’s goals and objectives and its 

overall financial strength. The policies clearly delineate accountability and lines of authority 

across the institution’s activities. The policies also provide for the review of new activities to 

ensure that the infrastructure necessary to identify, monitor, and control the associated risks is in 

place before the activities are initiated.

Rating 2 (Satisfactory). An assessment of Satisfactory indicates that the policies, procedures and 

limits cover all major business areas, are thorough and substantially up-to-date, and provide a 

clear delineation of accountability and lines of authority across the institution’s activities. 

Policies, procedures, and limits are generally consistent with the institution’s goals and 

objectives and its overall financial strength. Also, the policies provide for adequate due 

diligence before engaging in new activities or products. Any deficiencies or gaps that have been 

identified are minor in nature and in the process of being addressed. Weaknesses should not 

have a significant effect on the safety and soundness of the institution.

Rating 3 (Fair). An assessment of Fair signifies that deficiencies exist in policies, procedures, 

and limits that require more than normal supervisory attention. The deficiencies may involve a 

broad range of activities or be material to a major business line or activity. The deficiencies may 

include policies, procedures, or limits (or the lack thereof) that do not adequately identify, 

measure, monitor, or control the risks posed by significant activities; are not consistent with the 

experience of staff, the organization’s strategic goals and objectives, or the financial strength of 

the institution; or do not clearly delineate accountability or lines of authority. Also, the policies 

may not provide for adequate due diligence before engaging in new activities or products. 

Weaknesses noted could have adverse effects on the safety and soundness of the institution 

unless corrective action is taken by management.
Page 16 of 25

Rating 4 (Marginal). An assessment of Marginal indicates deficient policies, procedures, and 

limits that do not address a number of significant risks to the institution. Multiple practices are 

in need of immediate improvement, which may include policies, procedures, or limits (or the 

lack thereof) that ineffectively identify, measure, monitor, or control the risks posed by 

significant activities; are not commensurate with the experience of staff, the institution’s 

strategic goals and objectives, or the financial strength of the institution; or do not delineate 

accountability or lines of authority. Moreover, policies may be considerably lacking with 

regards to providing for effective due diligence before engaging in new activities or products. 

These conditions warrant a high degree of supervisory attention because, unless properly 

addressed, they could seriously affect the safety and soundness of the institution.

Rating 5 (Unsatisfactory). An assessment of Unsatisfactory indicates a critical absence of 

effective policies, procedures, and limits. Policies, procedures, or limits (or the lack thereof) are 

largely or entirely ineffective with regard to identifying, measuring, monitoring, or controlling 

the risks posed by significant activities; are completely inconsistent with the experience of staff, 

the organization’s strategic goals and objectives, or the financial strength of the institution; or do 

not delineate accountability or lines of authority. Also, policies may be completely lacking with 

regard to providing for effective due diligence before engaging in new activities or products. 

Critical weaknesses could seriously jeopardize the continued viability of the institution and 

require immediate and close supervisory attention.

Risk Monitoring and MIS

Rating 1 (Strong). An assessment of Strong indicates that risk monitoring practices and MIS 

reports address all material risks. The key assumptions, data sources, and procedures used in 

measuring and monitoring risk are appropriate, thoroughly documented, and frequently tested for 

reliability. Reports and other forms of communication are consistent with activities, are 

structured to monitor exposures and compliance with established limits, goals, or objectives, and 

compare actual versus expected performance when appropriate. Management and board reports 

are accurate and timely and contain sufficient information to identify adverse trends and to 

thoroughly evaluate the level of risk faced by the institution.

Rating 2 (Satisfactory). An assessment of Satisfactory indicates that risk monitoring practices 

and MIS reports cover major risks and business areas, although they may be lacking in some 

modest degree. In general, the reports contain valid assumptions that are periodically tested for 

accuracy and reliability and are adequately documented and distributed to the appropriate 

decision-makers. Reports and other forms of communication generally are consistent with 

activities; are structured to monitor exposures and compliance with established limits, goals, or 

objectives; and compare actual versus expected performance when appropriate. Management 

and board reports are generally accurate and timely, and broadly identify adverse trends and the 

level of risk faced by the institution. Any weaknesses or deficiencies that have been identified 

are in the process of being addressed.

Rating 3 (Fair). An assessment of Fair signifies that weaknesses exist in the institution’s risk 

monitoring practices or MIS reports that require more than normal supervisory attention. The
Page 17 of 25

weaknesses may involve a broad range of activities or be material to a major business line or 

activity. They may contribute to ineffective risk identification or monitoring through 

inappropriate assumptions, incorrect data, poor documentation, or the lack of timely testing. In 

addition, MIS reports may not be distributed to the appropriate decision-makers, adequately 

monitor significant risks, or properly identify adverse trends and the level of risk faced by the 

institution. Weaknesses noted could have adverse effects on the safety and soundness of the 

institution if corrective action is not taken by management.

Rating 4 (Marginal). An assessment of Marginal represents deficient risk monitoring practices or 

MIS reports that, unless properly addressed, could seriously affect the safety and soundness of 

the institution. A number of significant risks to the institution are not adequately monitored or 

reported. Ineffective risk identification may result from notably inappropriate assumptions, 

incorrect data, poor documentation, or the lack of timely testing. In addition, MIS reports may 

not be distributed to the appropriate decision-makers, may inadequately monitor significant risks, 

or fail to identify adverse trends and the level of risk faced by the institution. The risk 

monitoring and MIS deficiencies warrant a high degree of supervisory attention because, unless 

properly addressed, they could seriously affect the safety and soundness of the institution.

Rating 5 (Unsatisfactory). An assessment of Unsatisfactory indicates a critical absence of risk 

monitoring and MIS. They are wholly deficient due to inappropriate assumptions, incorrect data, 

poor documentation, or the lack of timely testing. Moreover, MIS reports may not be distributed 

to the appropriate decision-makers, fail to monitor significant risks, or fail to identify adverse 

trends and the level of risk faced by the institution. These critical weaknesses require immediate 

and close supervisory attention, as they could seriously jeopardize the continued viability of the 

institution.

Internal Controls

Rating 1 (Strong). An assessment of Strong indicates that the system of internal controls is robust 

for the type and level of risks posed by the nature and scope of the organization’s activities. The 

organizational structure establishes clear lines of authority and responsibility for monitoring 

adherence to policies, procedures, and limits, and wherever applicable, exceptions are noted and 

promptly investigated. Reporting lines provide clear independence of the control areas from the 

business lines and separation of duties throughout the organization. Robust procedures exist for 

ensuring compliance with applicable laws and regulations, including consumer laws and 

regulations. Financial, operational, and regulatory reports are reliable, accurate, and timely. 

Internal audit or other control review practices provide for independence and objectivity.

Internal controls and information systems are thoroughly tested and reviewed; the coverage, 

procedures, findings, and responses to audits and review tests are well documented; identified 

material weaknesses are given thorough and timely high level attention; and management’s 

actions to address material weaknesses are objectively reviewed and verified. The board or its 

audit committee regularly reviews the effectiveness of internal audits and other control review 

activities.
Page 18 of 25

Rating 2 (Satisfactory). An assessment of Satisfactory indicates that the system of internal 

controls adequately covers major risks and business areas, with some modest weaknesses. In 

general, the control functions are independent from the business lines, and there is appropriate 

separation of duties. The control system supports accuracy in record-keeping practices and 

reporting systems, is adequately documented, and verifies compliance with laws and regulations, 

including consumer laws and regulations. Internal controls and information systems are 

adequately tested and reviewed, and the coverage, procedures, findings, and responses to audits 

and review tests are documented. Identified material weaknesses are given appropriate attention 

and management’s actions to address material weaknesses are objectively reviewed and verified. 

The board or its audit committee reviews the effectiveness of internal audits and other control 

review activities. Any weaknesses or deficiencies that have been identified are modest in nature 

and in the process of being addressed.

Rating 3 (Fair). An assessment of Fair signifies that weaknesses exist in the system of internal 

controls that require more than normal supervisory attention. The weaknesses may involve a 

broad range of activities or be material to a major business line or activity. The weaknesses may 

include insufficient oversight of internal controls and audit by the board or its audit committee; 

unclear or conflicting lines of authority and responsibility; a lack of independence between 

control areas and business activities; or ineffective separation of duties. The internal control 

system may produce inadequate or untimely risk coverage and verification, including monitoring 

compliance with both safety and soundness and consumer laws and regulations; inaccurate 

records or financial, operational, or regulatory reporting; a lack of documentation for work 

performed; or a lack of timeliness in management review and correction of identified 

weaknesses. Weaknesses noted could have adverse effects on the safety and soundness of the 

institution if corrective action is not taken by management.

Rating 4 (Marginal). An assessment of Marginal represents a deficient internal control system 

that does not adequately address a number of significant risks to the institution. The deficiencies 

may include neglect of internal controls and audit by the board or its audit committee; conflicting 

lines of authority and responsibility; a lack of independence between control areas and business 

activities; or no separation of duties in critical areas. The internal control system may produce 

inadequate, untimely, or nonexistent risk coverage and verification in certain areas, including 

monitoring compliance with both safety and soundness and consumer laws and regulations; 

inaccurate records or financial, operational, or regulatory reporting; a lack of documentation for 

work performed; or infrequent management review and correction of identified weaknesses. The 

internal control deficiencies warrant a high degree of supervisory attention because, unless 

properly addressed, they could seriously affect the safety and soundness of the institution.

Rating 5 (Unsatisfactory). An assessment of Unsatisfactory indicates a critical absence of an 

internal control system. There may be no oversight by the board or its audit committee; 

conflicting lines of authority and responsibility; no distinction between control areas and 

business activities; or no separation of duties. The internal control system may produce totally 

inadequate or untimely risk coverage and verification, including monitoring compliance with 

both safety and soundness and consumer laws and regulations; completely inaccurate records or
Page 19 of 25

regulatory reporting; a severe lack of documentation for work performed; or no management 

review and correction of identified weaknesses. Such deficiencies require immediate and close 

supervisory attention, as they could seriously jeopardize the continued viability of the institution.

Financial Condition Component

Rating 1 (Strong). A rating of 1 indicates that the consolidated holding company is financially 

sound in almost every respect; any negative findings are basically of a minor nature and can be 

handled in a routine manner. The capital adequacy, asset quality, earnings, and liquidity of the 

consolidated holding company are more than adequate to protect the company from reasonably 

foreseeable external economic and financial disturbances. The company generates more than 

sufficient cash flow to service its debt and fixed obligations with no harm to subsidiaries of the 

organization.

Rating 2 (Satisfactory). A rating of 2 indicates that the consolidated holding company is 

fundamentally financially sound, but may have modest weaknesses correctable in the normal 

course of business. The capital adequacy, asset quality, earnings and liquidity of the 

consolidated holding company are adequate to protect the company from external economic and 

financial disturbances. The company also generates sufficient cash flow to service its 

obligations; however, areas of weakness could develop into areas of greater concern. To the 

extent minor adjustments are handled in the normal course of business, the supervisory response 

is limited.

Rating 3 (Fair). A rating of 3 indicates that the consolidated holding company exhibits a 

combination of weaknesses ranging from fair to moderately severe. The company has less than 

adequate financial strength stemming from one or more of the following: modest capital 

deficiencies, substandard asset quality, weak earnings, or liquidity problems. As a result, the 

holding company and its subsidiaries are less resistant to adverse business conditions. The 

financial condition of the holding company will likely deteriorate if concerted action is not taken 

to correct areas of weakness. The company’s cash flow is sufficient to meet immediate 

obligations, but may not remain adequate if action is not taken to correct weaknesses. 

Consequently, the holding company is vulnerable and requires more than normal supervision. 

Overall financial strength and capacity are still such as to pose only a remote threat to the 

viability of the company.

Rating 4 (Marginal). A rating of 4 indicates that the consolidated holding company has either 

inadequate capital, an immoderate volume of problem assets, very weak earnings, serious 

liquidity issues, or a combination of factors that are less than satisfactory. An additional 

weakness may be that the holding company’s cash flow needs are met only by upstreaming 

imprudent dividends and/or fees from subsidiaries. Unless prompt action is taken to correct 

these conditions, they could impair future viability. Holding companies in this category require 

close supervisory attention and increased financial surveillance.

Rating 5 (Unsatisfactory). A rating of 5 indicates that the volume and character of financial 

weaknesses of the holding company are so critical as to require urgent aid from shareholders or 

other sources to prevent insolvency. The imminent inability of such a company to service its
Page 20 of 25

fixed obligations and/or prevent capital depletion due to severe operating losses places its 

viability in serious doubt. Such companies require immediate corrective action and constant 

supervisory attention.

The Financial Condition Subcomponents

The financial condition subcomponents can be evaluated along business lines, product lines, or 

legal entity lines--depending on which type of review is most appropriate for the holding 

company structure.

Capital Adequacy

Rating 1 (Strong). A rating of 1 indicates that the consolidated holding company maintains more 

than adequate capital to support the volume and risk characteristics of all parent and subsidiary 

business lines and products; provide a sufficient cushion to absorb unanticipated losses arising 

from the parent and subsidiary activities; and support the level and composition of parent and 

subsidiary borrowing. In addition, a company assigned a rating of 1 has more than sufficient 

capital to provide a base for the growth of risk assets and the entry into capital markets as the 

need arises for the parent company and subsidiaries.

Rating 2 (Satisfactory). A rating of 2 indicates that the consolidated holding company maintains 

adequate capital to support the volume and risk characteristics of all parent and subsidiary 

business lines and products; provide a sufficient cushion to absorb unanticipated losses arising 

from the parent and subsidiary activities; and support the level and composition of parent and 

subsidiary borrowing. In addition, a company assigned a rating of 2 has sufficient capital to 

provide a base for the growth of risk assets and the entry into capital markets as the need arises 

for the parent company and subsidiaries.

Rating 3 (Fair). A rating of 3 indicates that the consolidated holding company may not maintain 

sufficient capital to ensure support for the volume and risk characteristics of all parent and 

subsidiary business lines and products; the unanticipated losses arising from the parent and 

subsidiary activities; or the level and composition of parent and subsidiary borrowing. In 

addition, a company assigned a rating of 3 may not maintain a sufficient capital position to 

provide a base for the growth of risk assets and the entry into capital markets as the need arises 

for the parent company and subsidiaries. The capital position of the consolidated holding 

company could quickly become inadequate in the event of asset deterioration or other negative 

factors and therefore requires more than normal supervisory attention.

Rating 4 (Marginal). A rating of 4 indicates that the capital level of the consolidated holding 

company is significantly below the amount needed to ensure support for the volume and risk 

characteristics of all parent and subsidiary business lines and products; the unanticipated losses 

arising from the parent and subsidiary activities; and the level and composition of parent and 

subsidiary borrowing. In addition, a company assigned a rating of 4 does not maintain a 

sufficient capital position to provide a base for the growth of risk assets and the entry into capital 

markets as the need arises for the parent company and subsidiaries. If left unchecked, the 

consolidated capital position of the company might evolve into weaknesses or conditions that
Page 21 of 25

could threaten the viability of the institution. The capital position of the consolidated holding 

company requires immediate supervisory attention.

Rating 5 (Unsatisfactory). A rating of 5 indicates that the level of capital of the consolidated 

holding company is critically deficient and in need of immediate corrective action. The 

consolidated capital position threatens the viability of the institution and requires constant 

supervisory attention.

Asset Quality

Rating 1 (Strong). A rating of 1 indicates that the holding company maintains strong asset quality 

across all parts of the organization, with a very low level of criticized and nonperforming assets. 

Credit risk across the organization is commensurate with management’s abilities and modest in 

relation to credit risk management practices.

Rating 2 (Satisfactory). A rating of 2 indicates that the holding company maintains satisfactory 

asset quality across all parts of the organization, with a manageable level of criticized and 

nonperforming assets. Any identified weaknesses in asset quality are correctable in the normal 

course of business. Credit risk across the organization is commensurate with management’s 

abilities and generally modest in relation to credit risk management practices.

Rating 3 (Fair). A rating of 3 indicates that the asset quality across all or a material part of the 

consolidated holding company is less than satisfactory. The holding company may be facing a 

decrease in the overall quality of assets currently maintained on and off balance sheet. The 

holding company may also be experiencing an increase in credit risk exposure that has not been 

met with an appropriate improvement in risk management practices. Holding companies 

assigned a rating of 3 require more than normal supervisory attention.

Rating 4 (Marginal). A rating of 4 indicates that the holding company’s asset quality is deficient. 

The level of problem assets and/or unmitigated credit risk subjects the holding company to 

potential losses that, if left unchecked, may threaten its viability. Holding companies assigned a 

rating of 4 require immediate supervisory attention.

Rating 5 (Unsatisfactory). A rating of 5 indicates that the holding company’s asset quality is 

critically deficient and presents an imminent threat to the institution's viability. Holding 

companies assigned a rating of 5 require immediate remedial action and constant supervisory 

attention.

Earnings

Rating 1 (Strong). A rating of 1 indicates that the quantity and quality of the holding company’s 

consolidated earnings over time are more than sufficient to make full provision for the absorption 

of losses and/or accretion of capital when due consideration is given to asset quality and holding 

company growth. Generally, holding companies with a 1 rating have earnings well above peergroup averages.

Rating 2 (Satisfactory). A rating of 2 indicates that the quantity and quality of the holding 

company’s consolidated earnings over time are generally adequate to make provision for the
Page 22 of 25

absorption of losses and/or accretion of capital when due consideration is given to asset quality 

and holding company growth. Generally, holding companies with a 2 rating have earnings that 

are in line with or slightly above peer-group averages.

Rating 3 (Fair). A rating of 3 indicates that the holding company’s consolidated earnings are not 

fully adequate to make provisions for the absorption of losses and the accretion of capital in 

relation to company growth. The consolidated earnings of companies rated 3 may be further 

clouded by static or inconsistent earnings trends, chronically insufficient earnings, or less than 

satisfactory asset quality. Holding companies with a 3 rating generally have earnings below 

peer-group averages. Such holding companies require more than normal supervisory attention.

Rating 4 (Marginal). A rating of 4 indicates that the holding company’s consolidated earnings, 

while generally positive, are clearly not sufficient to make full provision for losses and the 

necessary accretion of capital. Holding companies with earnings rated 4 may be characterized 

by erratic fluctuations in net income, poor earnings (and the likelihood of the development of a 

further downward trend), intermittent losses, chronically depressed earnings, or a substantial 

drop from the previous year. The earnings of such companies are generally substantially below 

peer-group averages. Such holding companies require immediate supervisory attention.

Rating 5 (Unsatisfactory). A rating of 5 indicates that the holding company is experiencing 

losses or a level of earnings that is worse than that described for the 4 rating. Such losses, if not 

reversed, represent a distinct threat to the holding company’s solvency through erosion of 

capital. Such holding companies require immediate and constant supervisory attention.

Liquidity

Rating 1 (Strong). A rating of 1 indicates that the holding company maintains strong liquidity 

levels and well developed funds management practices. The parent company and subsidiaries 

have reliable access to sufficient sources of funds on favorable terms to meet present and 

anticipated liquidity needs.

Rating 2 (Satisfactory). A rating of 2 indicates that the holding company maintains satisfactory 

liquidity levels and funds management practices. The parent company and subsidiaries have 

access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity 

needs. Modest weaknesses in funds management practices may be evident, but those 

weaknesses are correctable in the normal course of business.

Rating 3 (Fair). A rating of 3 indicates that the holding company’s liquidity levels or funds 

management practices are in need of improvement. Holding companies rated 3 may lack ready 

access to funds on reasonable terms or may evidence significant weaknesses in funds 

management practices at the parent company or subsidiary levels. However, these deficiencies 

are considered correctable in the normal course of business. Such holding companies require 

more than normal supervisory attention.

Rating 4 (Marginal). A rating of 4 indicates that the holding company’s liquidity levels or funds 

management practices are deficient. Institutions rated 4 may not have or be able to obtain a
Page 23 of 25

sufficient volume of funds on reasonable terms to meet liquidity needs at the parent company or 

subsidiary levels and require immediate supervisory attention.

Rating 5 (Unsatisfactory). A rating of 5 indicates that the holding company’s liquidity levels or 

funds management practices are critically deficient and may threaten the continued viability of 

the institution. Institutions rated 5 require constant supervisory attention and immediate external 

financial assistance to meet maturing obligations or other liquidity needs.

Impact Component

The I component rating reflects the aggregate potential impact of the nondepository 

entities on the subsidiary depository institution(s). It is rated on a five point numerical scale. 

Ratings will be assigned in ascending order of supervisory concern as follows:

1 - low likelihood of significant negative impact;

2 - limited likelihood of significant negative impact;

3 - moderate likelihood of significant negative impact;

4 - considerable likelihood of significant negative impact; and

5 - high likelihood of significant negative impact.

Rating 1 (Low Likelihood of Significant Negative Impact). A rating of 1 indicates that the 

nondepository entities of the holding company are highly unlikely to have a significant negative 

impact on the subsidiary depository institution(s) due to the sound financial condition of the 

nondepository entities, the strong risk management practices within the nondepository entities, or 

the corporate structure of the holding company. The holding company maintains an appropriate 

capital allocation across the organization commensurate with associated risks. Intra-group 

exposures, including servicing agreements, are very unlikely to undermine the financial 

condition of the subsidiary depository institution(s). Parent company cash flow is sufficient and 

not dependent on excessive dividend payments from subsidiaries. The potential risks posed to 

the subsidiary depository institution(s) by strategic plans, the control environment, risk 

concentrations, or legal or reputational issues within or facing the nondepository entities are 

minor in nature and can be addressed in the normal course of business.

Rating 2 (Limited Likelihood of Significant Negative Impact). A rating of 2 indicates a limited 

likelihood that the nondepository entities of the holding company will have a significant negative 

impact on the subsidiary depository institution(s) due to the adequate financial condition of the 

nondepository entities, the satisfactory risk management practices within the parent 

nondepository entities, or the corporate structure of the holding company. The holding company 

maintains adequate capital allocation across the organization commensurate with associated 

risks. Intra-group exposures, including servicing agreements, are unlikely to undermine the 

financial condition of the subsidiary depository institution(s). Parent company cash flow is 

satisfactory and generally does not require excessive dividend payments from subsidiaries. The 

potential risks posed to the subsidiary depository institution(s) by strategic plans, the control
Page 24 of 25

environment, risk concentrations, or legal or reputational issues within the nondepository entities 

are modest and can be addressed in the normal course of business.

Rating 3 (Moderate Likelihood of Significant Negative Impact). A rating of 3 indicates a 

moderate likelihood that the aggregate impact of the nondepository entities of the holding 

company on the subsidiary depository institution(s) will have a significant negative impact on 

the subsidiary depository institution(s) due to weaknesses in the financial condition and/or risk 

management practices of the nondepository entities. The holding company may have only 

marginally sufficient allocation of capital across the organization to support risks. Intra-group 

exposures, including servicing agreements, may have the potential to undermine the financial 

condition of the subsidiary depository institution(s). Parent company cash flow may at times 

require excessive dividend payments from subsidiaries. Strategic growth plans, weaknesses in 

the control environment, risk concentrations or legal or reputational issues within the 

nondepository entities may pose significant risks to the subsidiary depository institution(s). A 

holding company assigned a 3 impact rating requires more than normal supervisory attention, as 

there could be adverse effects on the safety and soundness of the subsidiary depository 

institution(s) if corrective action is not taken by management.

Rating 4 (Considerable Likelihood of Significant Negative Impact). A rating of 4 indicates that 

there is a considerable likelihood that the nondepository entities of the holding company will 

have a significant negative impact on the subsidiary depository institution(s) due to weaknesses 

in the financial condition and/or risk management practices of the nondepository entities. A 4­

rated holding company may have insufficient capital within the nondepository entities to support 

their risks and activities. Intra-group exposures, including servicing agreements, may also have 

the immediate potential to undermine the financial condition of the subsidiary depository 

institution(s). Parent company cash flow may be dependent on excessive dividend payments 

from subsidiaries. Strategic growth plans, weaknesses in the control environment, risk 

concentrations or legal or reputational issues within the nondepository entities may pose 

considerable risks to the subsidiary depository institution(s). A holding company assigned a 4 

impact rating requires immediate remedial action and close supervisory attention because the 

nondepository entities could seriously affect the safety and soundness of the subsidiary 

depository institution(s).

Rating 5 (High Likelihood of Significant Negative Impact). A rating of 5 indicates a high 

likelihood that the aggregate impact of the nondepository entities of the holding company on the 

subsidiary depository institution(s) is or will become significantly negative due to substantial 

weaknesses in the financial condition and/or risk management practices of the nondepository 

entities. Strategic growth plans, a deficient control environment, risk concentrations or legal or 

reputational issues within the nondepository entities may pose critical risks to the subsidiary 

depository institution(s). The parent company also may be unable to meet its obligations without 

excessive support from the subsidiary depository institution(s). The holding company requires 

immediate and close supervisory attention, as the nondepository entities seriously jeopardize the 

continued viability of the subsidiary depository institution(s).
Page 25 of 25

(D) (Depository Institutions) Component

The (D) component identifies the overall condition of the subsidiary depository 

institution(s) of the holding company. For holding companies with only one subsidiary 

depository institution, the (D) component rating generally will mirror the CAMELS composite 

rating for that depository institution. To arrive at a (D) component rating for holding companies 

with multiple subsidiary depository institutions, the CAMELS composite ratings for each of the 

depository institutions should be weighted, giving consideration to asset size and the relative 

importance of each depository institution within the overall structure of the organization. In 

general, it is expected that the resulting (D) component rating will reflect the lead depository 

institution’s CAMELS composite rating.

If in the process of analyzing the financial condition and risk management programs of 

the consolidated organization, a major difference of opinion regarding the safety and soundness 

of the subsidiary depository institution(s) emerges between the Federal Reserve and the 

depository institution’s primary regulator, then the (D) rating should reflect the Federal 

Reserve’s evaluation.