Banks are evaluated by a Federal Council staffed by several other agencies, including the Federal Reserve Bank.  The existing bank rating criteria, in effect in current form for thirty years, considered capital, asset quality, management quality, earnings, liquidity and exposure to market risk.

Proposed new guidance, being suggested by the Federal Council, moves away from this general analysis and focuses not on what may seem abstractly undesirable, but rather  focuses on what in fact creates material financial risks to safety and soundness.  Inter alia, the new framework removes consideration of management depth and succession per se as extraneous and not necessarily bearing on current risk.

Further, the current ratings consider reviews of information technology, consumer compliance and compliance with the Community Reinvestment Act in evaluating management; these evaluations under new guidance will be irrelevant unless they can be related to an actual current material risk to bank soundness.

I now note a theme in the above regulatory approach that may be an undercurrent in the regulatory approach of the current Federal Administration.  My immediately prior post noted that the SEC proposal revising regulation of public company climate disclosure, to eliminate reporting of what might be considered socially undesirable factors if these factors did not in fact create a current risk or weakness in the public company involved, took the same approach as these bank rating criteria: do not need to report things that may seem facially “bad” top some people, but only report what has current material detriment to the entity involved in the instant report.

This trend reflects, I suggest, an effort to remove general social critiques reflecting an intrusive liberal disclosure philosophy from government-mandated disclosure or consideration.  Regulation should not reflect policies which call for disclosure by, or intrusion into the affairs of, private business unless current material problems exist.  While this approach may offend liberal sensibilities, there is some logic to such a close definition of the proper role of government under libertarian principles.