A group of banks and business groups, including the Bank Policy Institute representing major banks like JPMorgan, Citigroup, and Goldman Sachs, are suing the Federal Reserve over the annual bank stress tests. They are joined by the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce, and the U.S. Chamber of Commerce in filing the suit. The aim of the lawsuit is to address “longstanding legal violations by subjecting the stress test process to public input as required by federal law.”
While the groups do not oppose stress testing, they argue that the current process is inadequate, leading to inconsistent and unexplained requirements and restrictions on bank capital. The Fed’s stress test is an annual assessment that obliges banks to maintain sufficient reserves for bad loans and determines the extent of share repurchases and dividends.
Following the market close on Monday, the Federal Reserve announced plans to make changes to the bank stress tests. It intends to seek public feedback on significant modifications to enhance transparency and reduce the volatility of capital buffer requirements resulting from the tests. The decision to alter the tests was influenced by changes in administrative laws in recent years, although specific modifications to the stress test framework were not detailed.
While the proposed changes may be viewed favorably by major banks, concerns remain about the adequacy of capital requirements. The alterations are not expected to significantly impact overall capital requirements, according to the Fed. BPI CEO Greg Baer welcomed the Fed’s announcement as a positive step towards transparency and accountability. However, he suggested that further actions may be considered to ensure timely reforms that align with legal and policy standards.
Groups like the BPI and the American Bankers Association have previously criticized the stress test process for its lack of transparency and its adverse effects on bank lending and economic growth. In July, these groups accused the Fed of violating the Administrative Procedure Act by not soliciting public feedback on stress scenarios and keeping supervisory models confidential.
