A group of banks and business groups have filed a lawsuit against the Federal Reserve over its annual bank stress tests. Advisor Hub reports.
The tests, implemented following the 2008 financial crisis, are aimed at forcing banks to maintain adequate cushions for bad loans and dictates the size of share repurchases and dividends. According to the Fed, the tests assess whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses
The lawsuit, filed in U.S. District Court in Columbus, Ohio, claims the Fed’s annual ritual does not follow proper administrative procedure. It was filed by the Bank Policy Institute (BPI), the American Bankers Association, the US Chamber of Commerce, and two local Ohio trade groups.
The plaintiffs seek to force the Fed to open the design of the tests to public comment, saying the lawsuit aims to “resolve longstanding legal violations by subjecting the stress test process to public input as required by federal law.” The groups said they are not opposed to the stress tests but contend that the current process is not adequate and “produces vacillating and unexplained requirements and restrictions on bank capital.”
The trade groups also want input on models used to determine capital changes and other aspects of the stress testing process.
“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,” BPI President and CEO Greg Baer said in a statement.
The Fed declined to comment on the lawsuit.
The suit was filed one day after the Fed announced that it is considering proposing changes to the stress tests and will be seeking public comment on what it calls “significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.”
Among the changes proposed by the central bank are disclosing and seeking public comment on all of the models that determine the hypothetical losses and revenue of banks under stress; averaging results over two years to reduce the year-over-year changes in the capital requirements that result from the stress test; and ensuring that the public can comment on the hypothetical scenarios used annually for the test, before the scenarios are finalized.
The public comment process on the stress test is likely to begin in early 2025. The plaintiffs in the lawsuit said they took their action to preserve their right for a legal challenge ahead of the 2026 stress testing process in case the Fed doesn’t go as far as the banks would like.
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