The Federal Reserve (“FR”) recently issued guidance outlining the factors it will consider in determining whether a state member community bank’s supervisory ratings should be upgraded (the “Guidance”). The FR stated that the Guidance is particularly relevant to institutions supervised by the FR with consolidated assets of $10 billion or less, including small community banks and bank holding companies.
The Guidance states that an upgrade is appropriate if an institution demonstrates improvements in its financial condition and risk management practices, particularly with regard to core financial components, overall risk management, and board oversight. The Guidance goes on to list other specific considerations including, for example, an institution’s capital and capital planning process, sustainable improvements in core earnings and asset quality, improvements in risk management capabilities, and prudent management of liquidity and interest rate risks. The FR issued the Guidance to clarify the application of interagency ratings guidelines during periods of stabilized or generally improving economic conditions.