The Fed wants to relax its assessment criteria for large banks

The US Federal Reserve is considering relaxing its system for assessing large banks, a reform that could facilitate mergers and acquisitions. This initiative is also in line with the Trump administration's policy of deregulation.

The US Federal Reserve is considering reforming its supervisory framework for large banks to make it easier for them to obtain a "well-managed" rating, which is essential for conducting mergers and acquisitions and other activities subject to restrictions.

Lowering requirements

The current assessment system is based on three main categories: capital, liquidity, governance, and controls. In each of these categories, four ratings are possible: meets expectations, meets expectations with conditions, deficient-1 and deficient-2. A single "deficient-1" rating is currently enough to cause a bank holding company to lose its "well-managed" status, resulting in restrictions, particularly on acquisitions.

The proposed reform would change the situation. From now on, deficiencies in several categories – or a single "deficient-2" rating – would be required to lose this status. This new approach could raise the rating of eight of the 36 US bank holding companies with assets exceeding $100bn. Currently, 23 of them are not considered well-managed.

Michelle Bowman, the Fed's vice chair for supervision, is defending the reform on pragmatic grounds. She insists that many large, well-capitalized banks with ample liquidity are denied "well-managed" status because of overly harsh or subjective assessments in certain categories, such as governance. "This proposal corrects this misalignment by adopting an approach focused on major financial risks," she said. Bowman also raised the possibility of a broader overhaul of the system, including the introduction of a single overall rating for each institution.

However, the proposal is not unanimous. Michael Barr, Fed governor and Bowman's predecessor in supervision, voted against it. He believes the plan weakens the supervisory framework by paving the way for acquisitions by poorly managed banks. "This would increase the likelihood and cost of their eventual failure," he warned, fearing a dilution of incentives to correct the structural weaknesses of certain institutions.

Deregulation as a lever for growth

If adopted, the reform would mark a significant change in how the Fed assesses the organizational and managerial health of large banks, amid ongoing debates about financial regulation and the balance between prudential rigor and banking sector dynamism.

Such a reform should lead to renewed activity in mergers and acquisitions, particularly amongst regional banks. "This should pave the way for more mergers and acquisitions," said Jaret Seiberg, an analyst at TD Cowen, noting that about two-thirds of large banks had previously been blocked by their ratings.

However, despite halving since the beginning of the century, the number of commercial banks in the United States remains very high. As such there is still room for consolidation.

Changes in the number of commercial banks in the United States between 2000 and 2024. Source: Statista

This reform is also in line with the deregulation policy advocated by the Trump administration. Efforts are likely to focus on the banking and energy sectors in particular. Tax cuts and deregulation are the two measures Donald Trump is promoting to boost growth.

On January 31, a few days after taking office, Donald Trump signed an executive order entitled "Unleashing Prosperity Through Deregulation." The executive order aims to significantly reduce the regulatory burden on businesses and citizens. In particular, it introduces the "1 for 10" rule, whereby for every new regulation, at least 10 existing regulations must be repealed.