LFI revamp gives banks best ratings yet

The US Federal Reserve's revised large financial institution framework has produced the highest share of firms deemed 'well-managed' in the public data series, Risk Quantum analysis shows.

The Fed's latest supervision and regulation report shows about 80% of firms were well-managed as of January 31, shortly after the new LFI regime took effect on January 16. The previous high in the Fed's data series was lower.

The LFI framework applies to the largest U.S. banks, including JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, and Wells Fargo. It replaced the previous supervisory rating system, which used four tiers. The new regime uses three categories: well-managed, satisfactory, and needs improvement.

The rating matters for capital requirements. The Fed's stress capital buffer is partly determined by a bank's supervisory rating. A well-managed designation can lower the buffer, freeing up capital that banks can use for dividends or share buybacks.

Risk Quantum analysis suggests the three-tier system concentrates more firms in the top category than the previous four-tier system did. The Fed's report did not disclose individual bank ratings. The data covers the period through January 31, the first public snapshot under the new LFI regime.