A group of banks and business organizations have filed a lawsuit against the Federal Reserve over its annual bank stress tests, arguing the process violates federal law by not allowing public input.
The Bank Policy Institute (BPI) filed the lawsuit, representing major banks like JPMorgan, Citigroup, and Goldman Sachs, along with the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce, and the U.S. Chamber of Commerce. They stated the lawsuit aims to make the stress test process more transparent and consistent.
The groups clarified they are not against stress testing but criticized the current system for creating inconsistent and unexplained requirements on bank capital.
The Federal Reserve’s stress tests are annual evaluations to ensure banks have enough financial reserves for bad loans and determine the size of dividends and share buybacks they can issue.
On Monday, after markets closed, the Fed announced it plans to make changes to the stress tests and will seek public feedback on improving their transparency and reducing volatility in capital buffer requirements. The Fed linked this decision to recent changes in administrative laws but did not specify what changes it would make to the testing framework.
While the planned updates may address some concerns, they might not satisfy banks completely. The Fed noted, “These proposed changes are not designed to materially affect overall capital requirements.”
BPI CEO Greg Baer welcomed the Fed’s move as a positive step, saying, “The Board’s announcement today is a first step towards transparency and accountability.” However, he hinted at further actions, adding, “We are reviewing it closely and considering additional options to ensure timely reforms that are both good law and good policy.”
Banks and groups like the BPI and American Bankers Association have previously criticized the stress test process for being secretive and leading to stricter capital rules that they say hurt lending and economic growth.
In July, these groups accused the Fed of violating the Administrative Procedure Act by not seeking public input on stress scenarios and keeping supervisory models private.
