WASHINGTON — Banks of all sizes — but particularly big banks — have received declining supervisory ratings in part due to lagging interest rate and liquidity risk-management practices, according to the Federal Reserve's most recent Supervision and Regulation report released Friday.
The number of outstanding supervisory findings at large financial institutions — those with total assets of $100 billion or more — continued to increase in the second half of 2023, the report found. Part of the increase was driven by findings related to weaknesses in liquidity and interest rate risk management, but governance and risk control shortcomings continued to constitute the majority — roughly two-thirds — of outstanding issues at large banks.
The report noted that by the end of the year, only about a third of large banks received satisfactory ratings across all three components of the Large Financial Institution, or LFI, rating system, which considers capital planning, liquidity management and governance for the largest banks.
"Supervisors have found weaknesses in interest rate risk and liquidity risk-management practices," read the report. "Some large financial institutions [also] continued to show weaknesses in governance and controls related to operational resilience, cybersecurity, and BSA/AML compliance."
The number of large banks with satisfactory ratings has been on a steady decline since 2019, according to the report, with 2023 marking a five-year low for big bank's supervisory report cards.
Despite lagging governance and liquidity management, the Fed noted the banking industry appears resilient at the moment, with the majority of firms operating with capital and liquidity levels above regulatory minimums. Overall, large banks' Common Equity Tier 1 capital ratios increased to 12.7% as of the close of 2023, up from 12.3% on June 30, 2023. The Fed also noted an increase in deposits since the
The majority of small and medium-sized banks continued to have satisfactory ratings and were found to have effective risk management practices. However, the agency notes supervisory ratings downgrades among those tiers of banks have seen a slight uptick also due to interest rate and liquidity risk-management practices.
Among the smallest banks, the predominant supervisory concerns centered around cybersecurity and credit risk. For medium-sized regional banks, the primary supervisory findings cited were market and liquidity risks, as well as cybersecurity.
The report comes at a time when the Fed is mulling
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