Key Points:

• Under the updated framework, banks can maintain a single “deficient-1” rating across the components of capital, liquidity, and governance and controls while still being considered “well managed.”
• Banks with a single “deficient-1” rating will no longer face activity or acquisition restrictions, and the presumption of enforcement action for deficient-1 ratings has been replaced by case-by-case supervisory discretion.

On November 5, 2025, the Board of Governors of the Federal Reserve System (Federal Reserve Board or FRB) finalizedrevisions (the Revisions) to its 2018 Rating System (LFI Framework), including similar changes to the Framework for the Supervision of Insurance Organizations. According to the FRB, the Revisions “more accurately reflect the strength of individual banks and better align the finalized framework with supervisory rating systems used for other banking organizations.” The Revisions are the Federal Reserve Board’s first significant regulatory reform action in the current administration, and are substantially similar to the proposal issued on July 15, 2025.

The LFI Framework

The LFI Framework is a rating system used by the FRB to evaluate whether large firms under its jurisdiction are[1]considered “well managed” for purposes of Section 2(o)(9) of the Bank Holding Company Act of 1956.

Ratings are based on three components:

• capital planning and positions;
• liquidity risk management and positions; and
• governance and controls (including consumer compliance, cybersecurity, internal audit, and anti-money laundering).

Each component has four potential (non-numeric) ratings:

• Broadly meets expectations: A firm’s practices and capabilities broadly meet supervisory expectations, and the firm possesses sufficient financial and operational strength and resilience to maintain safe-and-sound operations through a range of conditions.
• Conditionally meets expectations: Certain material financial or operational weaknesses in a firm’s practices or capabilities may place the firm’s prospects for remaining safe and sound through a range of conditions at risk if not resolved in a timely manner during the normal course of business.
• Deficient-1: Financial or operational deficiencies in a firm’s practices or capabilities put the firm’s prospects for remaining safe and sound through a range of conditions at significant risk. A firm with a Deficient-1 rating is required to take timely corrective action to correct financial or operational deficiencies and to restore and maintain its safety and soundness and compliance with laws and regulations.
• Deficient-2: Financial or operational deficiencies in a firm’s practices or capabilities present a threat to the firm’s safety and soundness or have already put the firm in an unsafe and unsound condition. A firm with a Deficient-2 rating is required to immediately implement comprehensive corrective measures and demonstrate the sufficiency of contingency planning in the event of further deterioration.

The Revisions

Prior to the Revisions, any single deficient rating across the components of capital, liquidity, and governance and controls disqualified a firm from being considered “well managed.” The Revisions represent a liberalization of that approach such that a firm may still be considered “well managed” even if it has one deficient-1 rating.

The result is that a firm will no longer be automatically barred from certain activities based solely on a single deficient‑1 rating (although applications and statutory prerequisites may still apply). A firm with two or more deficient-1 ratings, or a single deficient-2 rating for any component, will continue to be considered not well managed.

According to the FRB’s accompanying Staff memo, 17 of 36 firms subject to the LFI Framework were not considered well managed prior to the Revisions; the Revisions would reduce that number to 10. In addition, the Revisions remove the presumption of a formal or informal enforcement action for one or more deficient-1 ratings; however, a strong presumption of a formal enforcement action remains for any deficient‑2 rating.

The FRB indicated that these changes aim to more accurately assess banks’ financial and operational strength and resilience, focusing on overall safety rather than isolated deficiencies, and ensuring that the definition of “well managed” reflects a firm’s overall condition.

The Revisions also remove references to reputational risk in the Framework for the Supervision of Insurance Organizations, consistent with the FRB’s June 23, 2025, announcement that reputational risk will no longer be a component of examination programs in its supervision of banks. The move also aligns with an October 7, 2025, proposalissued by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) to eliminate reputation risk as a supervisory factor (see this Latham blog post).

The Revisions will be effective 60 days after publication in the Federal Register.

Benefits of the Revisions

The FRB cited various benefits of the Revisions, including:

• reduced compliance costs;
• increased financial innovation due to firms in well-managed status being able to more easily pursue certain activities such as investments in new businesses; and
• enhanced supervisory efficiency and efficacy.

Officials Weigh In

The Revisions were issued after a vote of six FRB governors in favor and one against.

FRB Vice Chair for Supervision Michelle W. Bowman was supportive of the Revisions, noting that the framework changes “help[] to ensure that overall firm condition is the primary consideration in a bank’s rating” rather than “isolated deficiencies in a single component.”[2]

FRB Governor Michael S. Barr voted against the Revisions (as he did with the original proposal) and issued a statementhighlighting his reservations. He asserted that the changes will undermine the FRB’s oversight of the country’s largest banks, “increas[ing] risks to individual banks, the financial system, households and businesses, and the broader economy.” He argued that the revisions eliminate the FRB’s expectation that large firms with significant deficiencies must take corrective action and therefore “reduce[] incentives for large banks to fix serious management problems.” Governor Barr also noted his broader concern over “the cumulative effect of the recent trend toward rolling back regulatory and supervisory requirements for the biggest banks,” including the Revisions and changes to certain large bank capital standards (see this Latham blog post).

Industry Groups Weigh In

Supporters of the original proposal were cited by the FRB as asserting that the Revisions “would more accurately reflect a firm’s financial and operational strength and resilience … and thus appropriately increase firms’ ability to expand efficiently, reduce compliance costs, and increase innovation.” A recalibrated LFI Framework would also “enable firms to more efficiently allocate resources between resolving material financial issues and serving customers and competing within the financial sector.”

The Bank Policy Institute issued a short statement in support of the Revisions, stating that they make the LFI Framework “a more useful tool for regulators by calibrating supervisory measures to more accurately reflect risk.”

The American Bankers Association supported the Revisions (referencing a letter issued in favor of the original proposal), stating that the prior rating system “often merely reflect[ed] an isolated deficiency in a single component rating based on a subjective assessment.”

Conclusion

The Revisions, along with other recent FRB, OCC, and FDIC developments, signal a shift at the banking regulators toward a less stringent supervisory posture. Critics of a lower bar for “well managed” status warn against the potential for reduced remediation incentives and increased systemic risks over time. Proponents, however, see the revisions as better aligning resources and supervisory consequences with overall firm condition. The Revisions ultimately reflect the current administration’s prioritization of capital formation, innovation, and reduced regulatory burden, and the FRB appears confident that the benefits of recalibrating the rating system will outweigh any attendant costs.

ENDNOTES

[1] The LFI Framework applies to bank holding companies and non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $100 billion or more, and US intermediate holding companies of foreign banking organizations with total consolidated assets of $50 billion or more. As of the third quarter of 2025, 36 firms were subject to the LFI Framework.

[2] These sentiments are consistent with the FRB’s October 29, 2025, Statement of Supervisory Operating Principles (published on November 18, 2025). The Principles state, among other things, that “[s]upervisory ratings should accurately reflect an institution’s financial condition and material financial risks,” and that “[a]ll component ratings should be considered and weighed based on their materiality to the institution.”

This post is based on a Latham & Watkins LLP memorandum, “Federal Reserve Board Finalizes Revisions to Its Supervisory Rating Framework,” dated November 21, 2025, and available here.