Major banks and corporate groups, represented by the Banking Policy Research Institute, are filing a lawsuit against the Federal Reserve regarding the annual bank stress test. Notable banks such as JP Morgan, Citigroup, and Goldman Sachs are part of this legal action, joined by several industry associations including the American Bankers Association and the U.S. Chamber of Commerce. The lawsuit seeks to reform the stress testing process by incorporating public input, which the groups argue is necessary to address long-standing legal violations.
The plaintiffs are not opposed to stress tests themselves; rather, they contend that the existing methods create unstable and unaccountable capital requirements for banks. These stress tests are designed to ensure that banks can withstand economic downturns by maintaining sufficient capital reserves and determining their capabilities for stock buybacks and dividend distributions.
In response to the impending lawsuit, the Federal Reserve announced that it is considering potential changes to the stress test framework aimed at enhancing transparency and reducing risks associated with capital requirement fluctuations. The Fed noted the influence of recent changes in administrative law on its decision to reevaluate the testing process, but did not specify what adjustments might be made.
While the Fed’s move to seek transparency is welcomed by industry leaders, concerns remain that any forthcoming changes might not adequately address the banks’ criticisms of the current capital requirements. The Banking Policy Research Institute’s CEO, Greg Baer, expressed cautious optimism regarding the Fed’s announcement, indicating that the groups involved may pursue further actions to ensure effective reforms going forward. Critics of the stress testing system have voiced concerns that its opacity restricts bank lending and hampers economic growth, highlighting a need for clearer and more open regulatory practices.