Banks sue Federal Reserve in challenge to stress tests

The lawsuit by bank trade groups came just a day after the Federal Reserve announced changes to the stress test process

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Bloomberg News

Evan Weinberger

Published Dec 24, 2024  •  3 minute read

Results of the Federal Reserves' stress tests can have major impacts on bank finances. Photo by JIM WATSON/AFP via Getty Images files

The United States Federal Reserve doesn’t allow for appropriate public input when designing bank stress tests, bank trade groups said in a lawsuit seeking to force the central bank to open the design of the tests to public comment.

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The suit, filed Tuesday in the U.S. District Court for the Southern District of Ohio, doesn’t seek to eliminate the annual stress testing and capital planning requirements that have been in place since 2009 as part of the government’s response to the 2008 financial crisis.

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Instead, the Bank Policy Institute (BPI), the American Bankers Association (ABA), the U.S. Chamber of Commerce, and two local Ohio trade groups are seeking to open up the scenario design, where the Fed measures bank capital and liquidity levels against a hypothetical recession. The trade groups also want input through the notice and comment rulemaking process 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 chief executive Greg Baer said in a statement.

The lawsuit doesn’t seek to mandate changes to or stop the upcoming 2025 stress testing process or alter capital planning requirements put in place following the 2024 exams.

The Fed declined to comment.

Results of the Fed’s stress tests can have a major impact on bank finances.

The Fed uses results to set stress capital buffers mandated to protect against financial shocks. The central bank can also reject stock buybacks and dividend payments for banks that perform poorly on tests.

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The lawsuit came just a day after the Fed announced coming changes to the stress test process.

The central bank plans to average banks’ resilience over a two-year period rather than the current one-year measure. The Fed also plans to open scenario designs to notice and comment rulemaking, the agency said in a Dec. 23 release.

The Fed acknowledged recent changes in administrative law, such as the U.S. Supreme Court’s June decision in Loper Bright Enterprises Inc. v. Raimondo, that eliminated judicial deference to regulatory agencies known as the Chevron doctrine, in its Dec. 23 announcement.

Some smaller changes could come ahead of the 2025 stress testing process, which begins in the early part of the year, the Fed said. Larger changes will go through the notice and comment rulemaking process next year, the central bank said.

The bank trade groups said in their suit that the Fed’s coming changes may address “some if not all” of their concerns over the stress testing process.

But they filed the suit in order 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, the complaint said.

The banks had a January deadline to file litigation, according to the complaint.

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“We remain hopeful the Fed will address long-standing issues with the stress tests, but this litigation preserves our ability to seek legal remedies if the Fed falls short,” ABA chief executive Rob Nichols said in a statement.

Porter Wright Morris & Arthur LLP and Gibson Dunn & Crutcher LLP represent the plaintiff trade groups.

Bloomberg.com

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