The Bank Policy Institute and the American Bankers Association have sent a letter to the Federal Reserve supporting proposed changes to the Large Financial Institution (LFI) rating system. The two associations argue that the current framework does not accurately reflect banks' performance and limits their ability to serve customers.
“If report cards worked like the current LFI ratings framework, a student’s GPA would equal their lowest grade,” the associations stated after filing the letter. “This wouldn’t give a complete picture of a student’s performance, and the current LFI ratings approach doesn’t give a complete picture of bank condition. We’re grateful the Federal Reserve is improving the usefulness of this framework so that it can more reliably spot and address actual risks.”
The LFI rating system is used by the Federal Reserve to assess banks based on capital planning, liquidity risk management, and governance controls. Under existing rules, if any one of these three components receives an unsatisfactory score, a bank is considered less-than-satisfactory overall—even if other components are strong. This status restricts banks from expanding products or services, making new investments or acquisitions, or reorganizing internally.
According to data cited by both groups, more than two-thirds of large banks have been rated unsatisfactory due to this method, despite regulators frequently noting that large financial institutions and the banking sector remain robust.
The associations support swift adoption of proposed reforms by the Federal Reserve. They also urge further changes: focusing ratings on material financial risks using objective standards; updating other frameworks such as CAMELS in similar ways; increasing transparency in how ratings are determined; offering meaningful appeal processes for downgraded banks; and adjusting which institutions qualify as "large" by linking asset thresholds to inflation and economic growth.
The Bank Policy Institute represents universal, regional, and major foreign banks operating in the United States through research and advocacy on regulatory issues. The American Bankers Association represents an industry with $24.5 trillion in assets that employs about 2.1 million people across small, regional, and large banks nationwide.