Banking Industry Groups File Lawsuit Over Federal Reserve Bank ‘Stress Test’ Policies

The United States Chamber of Commerce building is seen in Washington on May 10, 2021. Andrew Kelly/Reuters

Banks and business organizations have filed suit against the Federal Reserve (Fed), accusing it of running opaque stress tests that impose binding capital requirements without proper public input.

The plaintiffs, who include the Bank Policy Institute, the American Bankers Association, the U.S. Chamber of Commerce, the Ohio Bankers League, and the Ohio Chamber of Commerce, alleged in their Dec. 24 court filing that the central bank’s practices do not meet the administrative law standards Congress set for fair and transparent rulemaking.

“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,” Bank Policy Institute President and CEO Greg Baer said in a statement.

In their lawsuit, the plaintiffs cited the Fed’s statement that any prospective changes to stress tests are not meant to materially affect overall capital requirements.

The coalition said immediate legal action is necessary “to preserve our legal rights.” They also said that opening up the framework to public scrutiny would allow for beneficial adjustments and bolster both financial stability and economic growth.

The lawsuit followed a Federal Reserve announcement on Dec. 23 indicating that “the Federal Reserve Board will soon seek public comment on significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.”

Rob Nichols, president and CEO of the American Bankers Association, added, “While we support stress testing as an important risk management tool, ABA has long advocated for the Federal Reserve to increase the transparency of its stress testing program, which shields key components like supervisory models from public view.”

Tom Quaadman, senior vice president of economic policy at the U.S. Chamber of Commerce said “The current stress test regime acts as a regulation and restricts business financing.”

“Nevertheless, the stress tests were never submitted to public notice and comment and lacked the transparent administrative due process that rules must be subject to.”

The stress tests were introduced following the 2007–2009 financial crisis to gauge whether large banks can handle severe economic pressures, determine how much capital they must hold, and influence how much they may pay out to shareholders, according to Reuters.

The Federal Reserve has clarified that the changes are not intended to alter overall capital requirements but reflect shifts in administrative law brought on by new court rulings.

In June, the Supreme Court curtailed federal regulatory power by overturning the 1984 “Chevron doctrine,” which, for decades, had obliged courts to defer to agency interpretations of ambiguous laws—possibly emboldening the challenging of this particular federal regulatory power.

While the 2010 Dodd-Frank law broadly requires regulators to test banks’ balance sheets, Reuters reports that the specific way the Fed measures capital adequacy and the corresponding additional capital it directs lenders to hold are not explicitly mandated by statute.

The Fed, which has long expressed concern that fully revealing its testing models could allow banks to tailor their assets in ways that undercut the integrity of the exam, nevertheless announced potential changes ahead of its 2025 testing cycle, according to Reuters.

The Federal Reserve did not respond to The Epoch Times’ request for comment by publication time.

Reuters contributed to this report.