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Circular Letters

Circular Letter 5646

December 7, 2004

To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Financial Officer

Subject: NOTICE: BANK HOLDING COMPANY RATING SYSTEM

Summary:

The Board of Governors of the Federal Reserve System has issued a revised bank holding company (BHC) rating system. The revised system more closely aligns the Federal Reserve’s rating process with the focus of its current supervisory practices by placing an increased emphasis on risk management, providing a more flexible and comprehensive framework for evaluating financial condition, and requiring an explicit determination of the likelihood that the nondepository entities of a BHC will have a significant negative impact on the depository subsidiaries.

Under the revised rating system, each BHC is assigned a composite rating (C) based on an evaluation and rating of three essential components of an institution’s financial condition and operations. These three components are Risk Management (R); Financial Condition (C); and Potential Impact (I) of the parent company and nondepository subsidiaries on the subsidiary depository institutions. A fourth rating, Depository Institution (D), mirrors the primary regulator’s assessment of the subsidiary depository institutions. A simplified version of the rating system that includes only the R and C components will be applied to noncomplex bank holding companies with assets below $1 billion.

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 banking organization’s risk management and controls. The F component is supported by four subcomponents reflecting an assessment of the quality of the banking organization’s Capital; Asset Quality; Earnings; and Liquidity.

The policy also contains guidance on implementation of the revised rating system based on BHC size and complexity. A summary of public comments and the revised BHC rating system policy are in the Federal Register notice.

The Federal Register notice, published December 6, 2004, is available here PDF Icon (102 KB, 30 pages).

Date: The revised rating system becomes effective January 1, 2005.

For Further Information: Deborah Bailey, Associate Director, (202-452-2634), Barbara Bouchard, Deputy Associate Director, (202-452-3072), Molly Mahar, Senior Supervisory Financial Analyst, (202-452-2568), or Anna Lee Hewko, Supervisory Financial Analyst, (202-530-6260). For users of Telecommunications Device for the Deaf (TDD) only, please call 202/263-4869.