On November 5, 2025, the Board of Governors of the Federal Reserve System (the “FRB”) adopted, by a six-to-one vote (with Governor Michael Barr dissenting), a set of revisions to the supervisory ratings system applicable to holding companies of large financial institutions (“LFIs”) (the “LFI Framework”).^[1]

The amendments, which were adopted substantially as proposed,^[2] eliminate what former Federal Reserve Vice Chair for Supervision Randal Quarles termed the “ascetic principle”^[3] of the existing LFI Framework—the feature under which an institution is deemed not to be “well managed” if it is assigned a “Deficient-1” component rating for any of the three rating components.^[4] Until now, this feature of the LFI Framework has operated to disqualify an LFI holding company as well managed, and thereby largely preclude expansionary activity, if the holding company has a Deficient-1 rating for the Governance and Controls component, even if it maintains the highest-available ratings with respect to the Capital Planning and Positions and Liquidity Risk Management and Positions components.^[5]

Under the revisions adopted, an LFI holding company with at least two “Broadly Meets Expectations” or “Conditionally Meets Expectations” component ratings and no more than one Deficient-1 component rating would be considered well managed under the LFI Framework.^[6]

In addition, as proposed, the amendments remove the presumption that the FRB will bring an informal or formal enforcement action against a holding company that receives one or more Deficient-1 ratings.^[7]

The amendments will be effective 60 days after their date of publication in the Federal Register.^[8]

Background

In the years following the 2007–2009 financial crisis, the FRB developed a supervisory program specifically designed to address the risks to U.S. financial stability posed by LFIs. Since the adoption of the LFI Framework in 2018, LFIs have been defined to include: (i) bank holding companies with total consolidated assets of $100 billion or more; (ii) all non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $100 billion or more; and (iii) all U.S. intermediate holding companies of foreign banking organizations with total consolidated assets of $50 billion or more.^[9] The LFI Framework includes three component ratings and a four-level rating scale to evaluate “whether [an LFI] possesses sufficient financial and operational strength and resilience to maintain safe-and-sound operations and comply with laws and regulations, including those related to consumer protection, through a range of conditions.”^[10] The three rating components are: (i) Capital Planning and Positions; (ii) Liquidity Risk Management and Positions; and (iii) Governance and Controls. The four rating levels are: (i) Broadly Meets Expectations; (ii) Conditionally Meets Expectations; (iii) Deficient-1; and (iv) Deficient-2. Unlike other bank supervisory ratings frameworks (such as the CAMELS framework applicable to depository institutions and the RFI/C(D) rating system applicable to smaller bank holding companies), the current LFI Framework does not include a stand-alone management or a composite rating. Although the proposal sought comment on whether a stand-alone management or a composite should be adopted, no changes have been made to the LFI Framework in this regard.

Under the LFI Framework as it existed prior to the adoption of these revisions, a holding company that received a rating of Deficient-1 or Deficient-2 in any component rating was not considered well managed, was largely precluded from expansionary activity, and was subject to a presumption that the FRB would take formal or informal enforcement action against it.^[11]

The Federal Reserve periodically publishes a Supervision and Regulation Report. In each of the last two reports, the most recent of which was published in November 2024, approximately two-thirds of domestic LFIs were reported as having at least one Deficient-1 or Deficient-2 rating.^[12] They were therefore deemed not well managed and thus presumptively ineligible to make acquisitions. Based on the statement in the November 2024 Supervision and Regulation Report that “[m]ost large financial institutions met supervisory expectations with respect to capital planning and liquidity risk management,”^[13] it was widely assumed that a majority of these Deficient-1 or Deficient-2 ratings related to Governance and Controls.

Almost every LFI has opted to be treated as a “financial holding company” (“FHC”) under the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act (the “BHCA”).^[14] An FHC can engage in a broader range of financial services activities, such as underwriting, dealing and certain insurance operations.^[15] FHCs can also generally make nonbanking acquisitions without an application under Section 4(c)(8) of the BHCA.^[16] An LFI that is no longer deemed well managed, however, can no longer rely on its FHC status to engage in new activities or make acquisitions or investments.^[17] This loss of eligibility is typically formalized in a so-called 4(m) agreement, which is non-public. Further, an FHC that is no longer well managed is at risk of losing its FHC status altogether, although this draconian remedy has rarely been invoked.

Modifications Adopted to the LFI Framework

Under the finalized revisions to the LFI Framework, a holding company that receives at least two Broadly Meets Expectations or Conditionally Meets Expectations component ratings and no Deficient-2 component rating will be considered well managed.^[18]Relatedly, the “strong presumption” under the current LFI Framework that a holding company that receives one or more Deficient-1 component ratings will be subject to an informal or formal enforcement action will be removed; the decision whether to bring an enforcement action in that circumstance will instead be made on the basis of the particular facts and circumstances.^[19] The revised LFI Framework maintains the historical approach that a Deficient-2 rating in any component results in a holding company not being well managed and triggers a strong presumption that the FRB will impose a formal enforcement action.^[20]

The Adopting Release states that these revisions to the LFI Framework are intended to reflect the FRB’s experience “that a firm that has a Deficient-1 rating in an individual component while maintaining a rating of Broadly Meets Expectations or Conditionally Meets Expectations in its other two components would generally have sufficient financial and operational strength and resilience to maintain safe and sound operations through a range of conditions due to its overall robustness.”^[21] The Adopting Release notes that a Deficient-1 rating “can be indicative of a discrete deficiency” that “may not indicate material non-compliance with law or regulation.”^[22]

The Adopting Release stresses that a principal purpose of the revisions to the LFI Framework is to “better reflect the financial and operational strength and resilience of firms subject to” it.[23] The Adopting Release notes criticisms that the LFI Framework as it has been implemented historically “overemphasizes less important, procedural considerations at the expense of core, material financial risks.”[24] The Adopting Release notes the apparent contradiction between the fact that, as of year-end 2024, 23 out of 36 LFIs were treated as not well managed[25] and the Federal Reserve’s contemporaneous assessment that “most banks are well capitalized; liquidity and funding conditions are stable compared to 2023; and asset quality generally remains sound.”^[26] As an indication of the degree of improvement that has occurred during 2025 in the supervisory ratings assigned to LFIs generally, the Adopting Release presents data showing that since year-end 2024 the number of LFIs treated as not well managed has declined by six as of the third quarter of 2025.^[27] Nevertheless, the data indicate that nearly half of LFIs (i.e., 17 of 36 LFIs in total) were still treated as not well managed under the LFI Framework as it stood prior to the new revisions.^[28] Against this backdrop, the Adopting Release estimates that the immediate impact of the revisions to the LFI Framework will be to reduce the number of holding companies considered not well managed under the LFI Framework by seven to a total of 10 out of 36.^[29]

Implications

The revisions adopted to the LFI Framework will have immediate implications with respect to the enhanced ability of several LFIs to engage in expansionary activities. A bank holding company that has elected to be an FHC must continue to meet all eligibility criteria, including being well managed, or it will become subject to restrictions on its ability to rely on FHC authority to engage in new activities or make acquisitions and investments without an application.^[30] Holding companies that are not well managed are prohibited from engaging in interstate bank acquisitions^[31] and typically have been considered by the Federal Reserve to be presumptively ineligible to engage in expansionary activity, including mergers, acquisitions, asset purchases, and new activities, even if such expansionary activity would not rely on FHC authority.^[32]

The recalibration in how the Federal Reserve determines a holding company’s well-managed status under the LFI Framework will have a liberalizing effect on the ability of an LFI to engage in expansionary activities while it is assigned a single Deficient-1 component rating. As the Adopting Release notes, however, in some cases this liberalizing effect will be constrained if a holding company in this circumstance has a subsidiary depository institution that continues to be assigned supervisory ratings under the CAMELS framework that cause the depository institution to be treated as not well managed for BHCA purposes.^[33] The practical effect of this dynamic is specifically highlighted by the economic analysis section of the Adopting Release, which estimates that, although seven LFI holding companies would move into well-managed status as a result of the finalized revisions, only three of these organizations would be in a position to fully regain FHC eligibility due to the presence of a less-than-satisfactory composite or management rating under the CAMELS framework at the subsidiary depository institution level (or, in the case of a foreign banking organization, a less-than-satisfactory rating with respect to its combined U.S. operations or U.S. branches and agencies).^[34]

This analysis underscores that the ultimate impact of the amendments to the LFI Framework will depend to a significant degree on continued implementation of complementary reforms to the bank supervisory process, including taking a “fresh look” at the manner in which CAMELS ratings themselves are assigned.^[35] As Vice Chair for Supervision Bowman stated in a recent speech, “we and the other FFIEC agencies are reviewing the CAMELS ratings system, which is long past due for reform.”[36] Adoption of the revised LFI Framework represents the completion of an initial element of the supervisory reform agenda that will potentially enable the Federal Reserve and other banking agencies to turn greater attention toward advancing CAMELS reform and other supervisory reform initiatives

ENDNOTES

[1] Revisions to the Large Financial Institution Rating System and Framework for the Supervision of Insurance Organizations, Docket No. OP-1868 (Nov. 5, 2025) (“Adopting Release”), available athttps://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20251105a1.pdf. For Governor Barr’s dissenting statement, please see Michael S. Barr, Statement on Large Financial Institution Rating Framework Proposal by Governor Michael S. Barr (Nov. 5, 2025), available at https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20251105.htm.

[2] See Revisions to the Large Financial Institution Rating System and Framework for the Supervision of Insurance Organizations, 90 Fed. Reg. 31641 (Jul. 10, 2025) (“Proposal”), available at https://www.federalregister.gov/documents/2025/07/15/2025-13223/revisions-to-the-large-financial-institution-rating-system-and-framework-for-the-supervision-of. For additional background on the Proposal, please see Sullivan & Cromwell’s memorandum to clients regarding the Proposal: Revisions to the Large Financial Institution Rating System (Jul. 16, 2025), available at https://www.sullcrom.com/insights/memo/2025/July/Revisions-Large-Financial-Institution-Rating-System.

[3] Randal K. Quarles, Spontaneity and Order: Transparency, Accountability, and Fairness in Bank Supervision (Jan. 17, 2020), available at https://www.federalreserve.gov/newsevents/speech/quarles20200117a.htm.

[4] Adopting Release at 6.

[5] See FRB, Supervision and Regulation Report (Nov. 2024), available at https://www.federalreserve.gov/publications/files/202411-supervision-and-regulation-report.pdf (“November 2024 Supervision and Regulation Report”), at 17 (noting that “two-thirds of outstanding issues [at LFIs over the first half of 2024] related to firms’ governance and controls”).

[6] Adopting Release at 12.

[7] Id. at 24. As in the proposal, the amendments would also make parallel changes to the ratings system for depository institution holding companies that are significantly engaged in insurance activities (the “Insurance Supervisory Framework”), which is modeled on the LFI Framework. Id. at 8. In addition, noting that the FRB “has made clear that reputational risk is no longer a component that will be considered in examination programs and that this concept will be removed from supervisory materials,” the amendments would remove references to reputational risk from the Insurance Supervisory Framework. Id. at 25.

[8] Id. at 1.

[9] Large Financial Institution Rating System; Regulations K and LL, 83 Fed. Reg. 58724 (Nov. 21, 2018); FRB, Supervisory Letter SR 19-3 / CA 19-2, Large Financial Institution (LFI) Rating System (Feb. 26, 2019), available athttps://www.federalreserve.gov/supervisionreg/srletters/sr1903.htm.

[10] Adopting Release at 4-5.

[11] For additional background on the LFI Framework and a description of the subject matter encompassed by each of the component rating evaluations and the standards utilized to assign each of the four levels of ratings, please see Sullivan & Cromwell’s memorandum to clients regarding the 2018 adoption of the LFI Framework: New Supervisory Rating System for Large Banking Organizations (Nov. 5, 2018), available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/SC-Publication-New-Supervisory-Rating-System-for-Large-Banking-Organizations.pdf.

[12] November 2024 Supervision and Regulation Report at 16; FRB, Supervision and Regulation Report (May 2024), available athttps://www.federalreserve.gov/publications/files/202405-supervision-and-regulation-report.pdf, at 17.

[13] November 2024 Supervision and Regulation Report at 16.

[14] See National Information Center, Large Holding Companies (Jun. 30, 2025), available athttps://www.ffiec.gov/npw/Institution/TopHoldings.

[15] Adopting Release at 5-6.

[16] 12 U.S.C. § 1843(c)(8); see also 12 C.F.R. § 225.86.

[17] 12 U.S.C. § 1843(m); see also 12 C.F.R. § 225.83.

[18] Adopting Release at 12.

[19] Id. at 24.

[20] Id. at 51.

[21] Id. at 10.

[22] Id. at 22.

[23] Id. at 26.

[24] Id. at 13.

[25] Id. at 29.

[26] Id. at 20-21; see also November 2024 Supervision and Regulation Report at 1 (noting that “[t]he banking system remains sound and resilient overall”).

[27] Adopting Release at 29.

[28] Id. at 29 (citing data as of the third quarter of 2025).

[29] Id. at 33.

[30] 12 U.S.C. § 1843(m); see also 12 C.F.R. § 225.83.

[31] See 12 U.S.C. § 1842(d)(1)(A).

[32] See FRB, Supervisory Letter SR 14-2/CA 14-1, Enhancing Transparency in the Federal Reserve’s Applications Process (Feb. 24, 2014), available at https://www.federalreserve.gov/supervisionreg/srletters/sr1402.htm. For example, bank holding companies that are considered not well managed would be subject to limitations on the general consent authority for investments in foreign organizations pursuant to the FRB’s Regulation K. See 12 C.F.R. § 211.9(a).

[33] Adopting Release at 28.

[34] Id. at 33.

[35] See Proposal at 31645-46; Michelle W. Bowman, Taking a Fresh Look at Supervision and Regulation (Jun. 6, 2025), available at https://www.federalreserve.gov/newsevents/speech/files/bowman20250606a.pdf, at 4.

[36] Michelle W. Bowman, Opening Remarks, Speech at the Economic Growth and Regulatory Paperwork Reduction Act Outreach Meeting, Federal Reserve Bank of Kansas City, Kansas City, Missouri (Oct. 30, 2025), available at https://www.federalreserve.gov/newsevents/speech/bowman20251030a.htm.

This post is based on the Sullivan & Cromwell LLP memo, “Federal Reserve Adopts Revisions to Large Financial Institution Rating System,” dated November 11, 2025, and available here.