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SRC Insights: Third Quarter 2004

From BOPEC to RFI: A Change is Coming

In 1979, the Federal Reserve System implemented a bank holding company (BHC) rating system to define the condition of a BHC in a systemic and consistent manner. This system—known as BOPEC/F-M for the components that it rated—served three purposes: (i) providing a summary evaluation of the BHC's condition for use by the supervisory community; (ii) forming the basis of supervisory responses and actions; and (iii) providing the basis for supervisors' discussions with BHC management.

Today: BOPEC/F-M

 B = Condition of banking subsidiary(ies)
 O = Condition of the nonbank subsidiary(ies)
 P = Condition of the parent company
 E = Consolidated earnings position of the BHC
 C = Consolidated capital position of the BHC
 F = Financial composite rating
 M = Management composite rating

On July 23, 2004, the Federal Reserve published in the Federal Register a notice and request for comment on a proposed revised BHC rating system.1 The new rating system would emphasize risk management, provide a more comprehensive framework for assessing financial factors, and provide a framework for assessing and rating the potential impact of nondepository subsidiaries of a BHC on the subsidiary depository institutions. Accordingly, although there would be only five component and composite ratings—RFI/C (D)—they would be supported by eight subcomponents. With the exception of the four risk management subcomponents, which would be rated Strong, Adequate, or Weak, the composite, components, and subcomponents would continue to be rated on a 1 to 5 numeric scale, with a 1 indicating the highest rating.

… and Tomorrow?: RFI/C (D)

R = Risk management

  • Competence of Board and Senior Management
  • Policies, Procedures, and Limits
  • Risk Monitoring and Management Information Systems
  • Internal Controls

F = Financial condition

  • Capital
  • Asset Quality
  • Earnings
  • Liquidity

I = Impact of parent company and
 nondepository entities on subsidiary depository
 institutions

 C = Composite rating

 (D) = Generally mirrors the primary regulator's
 assessment of subsidiary depository
 institutions

Consistent with its risk-focused approaches to bank and BHC supervision, not all BHCs would be subject to the new rating system. Noncomplex BHCs with assets of $1 billion or less—essentially shell BHCs—would be assigned only an R and C rating. All other BHCs would receive the full RFI/C (D) rating, but the degree of emphasis on each of the components would vary based on each institution's circumstances.

A complete discussion of the proposal and an invitation to comment is available in the Federal Register or on the Board of Governor's web site.2 Comments are due to the Board by September 21, 2004.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.