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Groups representing banks and businesses, including the Bank Policy Institute, filed a lawsuit Tuesday against the Federal Reserve for violating federal law with “dark aspects of the stress testing framework.”
“For years, we have highlighted serious concerns about the stress testing framework and the need for reform,” Greg Baer, president and CEO of the Bank Policy Institute, said in a press release. “The current murky regime, combined with a lack of clear standards for global market shock and operational risk charging, continues to produce capital charges that are imprecise, unsustainable and excessive, resulting in reduced lending and economic growth. “.
Newsweek contacted the Federal Reserve for comment. Eric Kollig, who sits on the Federal Reserve Board, responded that his organization “has nothing to share at this time.”
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Why does it matter?
The lawsuit centers around the annual “stress test” used by the Board of Governors of the Federal Reserve System. The test determines certain capital requirements of the bank to withstand a possible severe economic shock.
According to the press release, the stress test directly affects American households and businesses by slowing job growth and hampering capital markets by raising the cost of credit.
What you need to know
Stress testing, introduced in 2008 after the global financial crisis, identifies potential weaknesses within banks and ensures they have enough capital if there is an economic shock.
In the court documents, it is noted that the banking groups have been asking the Board of Governors for some time to improve this process.
The banking groups noted in the lawsuit that they “do not oppose stress testing or capital requirements,” but that they “have a major impact on the cost of financial services for all Americans.”
“Federal regulations in such an important area must be enacted in a manner consistent with the requirements established by Congress to ensure fair, rigorous regulation and rational outcomes,” the lawsuit — which was filed by the Bank Policy Institute, along with American Bankers. Association, US Chamber of Commerce, Ohio Bankers Association and Ohio Chamber of Commerce-lexon. “The current stress testing process does not meet these requirements.”
At this time, the public is not offering its opinion on the stress test, as required by federal law.
“…the Federal Reserve’s stress testing framework violates both the Constitution and federal statutes such as the Administrative Procedure Act, which prohibits agencies from regulating in secret,” the press release said. “The Federal Reserve conducts its stress tests without providing transparency into its models or scenarios.”
The Administrative Procedure Law requires public notice and comment on significant changes. Each year, the Federal Reserve changes the minimum capital a bank must hold without public notice, according to the press release.
The Bank Policy Institute, which represents big banks such as JPMorgan Chase, Citigroup and Goldman Sachs, suggested that the Federal Reserve’s current framework leads to higher borrowing costs for bank customers. This in turn hurts local governments and businesses even though 75 percent of the funding for US businesses and government comes from the capital markets.
On Monday, the Federal Reserve announced it was considering changes to the stress test to improve transparency, citing an “evolving legal landscape.” The Bank Policy Institute called this an “important first step”.
What people say
Rob Nichols, president and CEO of the American Bankers Association, in a press release: “While we support stress testing as an important risk management tool, the ABA has long advocated that the Federal Reserve increase the transparency of its stress testing program, which shields key components such as supervisory models from public view. Nature the obscurity of these tests undermines the value of providing meaningful insights into bank resilience. To comply with federal law, the Fed must publish supervisory models and stress scenarios and invite public comment, which would enable banks and the public to better understand and prepare for regulatory expectations, reducing uncertainty and promoting a fairer and more predictable regulatory environment.”
Michael Adelman, president and CEO of the Ohio Bankers League, in a press release: “By bringing these cases to court, we are advocating for a fairer, more transparent framework that will allow our financial institutions to better serve Ohio families and businesses while promoting economic stability. This court case does not it’s about eliminating stress tests, but making sure the process is legally sound and effective in promoting a healthy and growing economy.”
Tom Quaadman, senior vice president of economic policy for the US Chamber of Commerce, in a press release: “Main Street businesses drive growth and job creation throughout the economy. Many of those Main Street businesses rely on bank lending to fuel that growth and manage their finances. The current stress test regime acts as a regulatory and limits business financing.”
Steve Stivers, president and CEO of the Ohio Chamber of Commerce, in a press release: “The American people deserve a fair and transparent stress testing process for banks. The current system restricts access to capital for businesses and families, killing jobs and the American dream.”
What happens next
The statute of limitations is February 2025, so the groups said they “have no choice but to file this lawsuit to preserve our legal rights” on Tuesday.
The lawsuit is hoping to ensure that “beginning in 2026” the Board of Governors will bring “stress test components to public notice and comment and comply with other applicable legal requirements.”