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US banking lobby groups said on Tuesday they’d filed a lawsuit against the Federal Reserve over the central bank’s stress testing framework, a significant escalation between the industry and regulators.
The announcement comes a day after the Fed announced plans for “significant changes” to its annual stress tests for giant US banks in an effort to make the method more transparent and the outcomes less volatile.
“We appreciate the board’s announcement as a primary step towards transparency and accountability, but consider it’s mandatory to file this suit to preserve our legal rights,” said Greg Baer, president and chief of the industry group the Bank Policy Institute, certainly one of five plaintiffs within the case. It’s the primary lawsuit the BPI has filed against the Fed.
The Fed declined to comment.
The lawsuit, filed in a federal court in Ohio, comes ahead of what the lobby groups said was an approaching deadline in February to bring a court challenge to among the stress test rules.
It also reflects a more aggressive approach lately by the banking industry. In 2023 and 2024, lobby groups waged a combative promoting campaign against the Fed’s proposed implementation of recent capital rules, so-called Basel III Endgame, and lobby groups had threatened to bring lawsuits.
The Fed has since scaled back its plans for Basel III Endgame, and the last word consequence will probably be influenced by the incoming Trump administration.
The industry is now taking aim at stress tests, an annual examination to see how well the biggest US banks — including JPMorgan Chase, Goldman Sachs and Bank of America — can withstand a series of catastrophic economic scenarios.
Probably the most recent test checked out how banks would handle a 40 per cent drop in industrial real estate prices and 36 per cent fall in house prices.
The Fed uses the outcomes to calculate the general requirements for bank capital that may be used to soak up losses.
Stress tests played a task in restoring confidence within the banking sector following the 2008 financial crisis. But they’ve come under criticism recently for the shortage of transparency over the models utilized in the method and volatility in the outcomes every year.
Within the lawsuit, the banking groups said they don’t oppose annual stress tests but are pushing for greater visibility into the method and the models used to project bank losses.
The groups said the Fed’s proposed changes to the stress test framework could address the industry’s concerns, but they’d filed the lawsuit to maintain their options open.
The banks are aiming to have any changes in place for the 2026 cycle of stress tests.
The majority of the banks’ lawsuit was brought under the Administrative Procedure Act, which stipulates how government agencies create and implement rules. A US Supreme Court ruling earlier this yr reined in agencies’ latitude for rulemaking.
The banks are in search of to require the Fed to publish its stress test models and scenarios, and to permit for public notification and comment on future models.
