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 is to address legal violations by allowing public input in the stress test process as required by federal law.
While the groups support stress testing, they criticize the current process for being inadequate and leading to inconsistent and unexplained capital requirements and restrictions on banks. The Fed’s stress test is an annual requirement that ensures banks maintain sufficient reserves for bad loans and determines share repurchases and dividends.
The Federal Reserve recently announced plans to make changes to the stress tests, seeking public feedback to enhance transparency and reduce capital buffer volatility. The decision to modify the tests is influenced by changes in administrative laws in recent years, although specific alterations to the stress test framework were not detailed.
Although big banks may see the changes as positive, concerns remain about the adequacy of the modifications in addressing capital requirements. The proposed changes are not expected to significantly impact overall capital requirements, according to the Fed. BPI CEO Greg Baer welcomed the Fed’s move as a step towards transparency and accountability, while hinting at potential further actions to ensure timely and effective reforms.
Groups like the BPI and the American Bankers Association have previously criticized the stress test process for its lack of transparency and its negative impact on bank lending and economic growth. They have accused the Fed of violating the Administrative Procedure Act by not seeking public input on stress scenarios and keeping supervisory models confidential.
