The biggest banks are planning to sue the Federal Reserve over the annual bank stress test
Bank trade groups argue that the Federal Reserve limits public input in the design of bank stress tests, according to a lawsuit seeking to require the central bank to open the test design process to public comment.
The lawsuit, filed Tuesday in the US District Court for the Southern District of Ohio, does not aim to eliminate the annual stress testing and capital planning requirements that have been in place since 2009 in response to the 2008 financial crisis.
Instead, the Bank Policy Institute, the American Bankers Association, the US Chamber of Commerce, and two Ohio-based trade groups are calling for greater transparency in the scenario design process. This includes how the Fed measures banks’ capital and liquidity against a hypothetical recession. They also want the central bank to allow public input, through the notice and comment rulemaking process, on the models used to determine capital changes and other aspects of stress testing.
“The current opaque regime, combined with the lack of clear standards for the global market shock and the operational risk charge, continues to produce capital charges that are inaccurate, volatile, and excessive, resulting in reduced lending and economic growth,” said Greg Baer, President and CEO of the Bank Policy Institute, in a statement.
The suit does not seek to halt the upcoming 2025 stress testing process or alter the capital planning requirements established after the 2024 tests.
The Federal Reserve declined to comment.
Stress Test Impact
The Fed’s stress test results significantly affect bank finances. These results are used to set stress capital buffers, which protect against financial shocks. Banks that perform poorly on the tests may face restrictions on stock buybacks and dividend payments.
The lawsuit follows the Fed’s recent announcement of changes to the stress testing process.
Fed Plans for Transparency
On Dec. 23, the Fed outlined plans to average banks’ resilience over a two-year period instead of the current one-year measure. Additionally, the Fed intends to open scenario designs to public notice and comment rulemaking. These changes align with recent shifts in administrative law, such as the Supreme Court’s June decision in Loper Bright Enterprises Inc. v. Raimondo, which overturned judicial deference to regulatory agencies under the Chevron doctrine.
The Fed noted that smaller updates could take effect before the 2025 stress testing process begins early in the year. Larger reforms will proceed through the notice and comment process in 2024.
Trade Group Concerns
The trade groups acknowledged that the Fed’s planned changes might address “some if not all” of their concerns. However, they filed the lawsuit to preserve their right to challenge the process ahead of the 2026 stress tests, should the Fed’s revisions fall short of their expectations, according to the complaint.