Big banks, business groups sue US Fed over annual stress tests

By Pete Schroeder

(Reuters) - Major banks and business groups sued the Federal Reserve on Tuesday, alleging the U.S. central bank's annual "stress tests" of Wall Street firms violate the law.

The lawsuit filed in U.S. District Court in Columbus (WA:CLC ), Ohio, claims the Fed's practice of determining how big banks perform against hypothetical economic turmoil, and assigning capital requirements accordingly, do not follow proper administrative procedure. Plaintiffs included the Bank Policy Institute, the U.S. Chamber of Commerce and the American Bank Association.

Specifically, the groups are calling for the Fed to make public and subject to feedback the now-confidential models they use to gauge bank performance, as well as details of the annual scenarios they create to test for weaknesses.

On Monday, the Fed announced plans to pursue similar changes ahead of the 2025 exams, but the industry opted to proceed with their lawsuit. A Fed spokesperson declined to comment on the lawsuit on Tuesday.



"The opaque nature of these tests undermines their value for providing meaningful insights into bank resilience," Rob Nichols, president and CEO of the American Bankers Association, said in a statement. "We remain hopeful the Fed will address long-standing issues with the stress tests, but this litigation preserves our ability to seek legal remedies if the Fed falls short.”

These tests, which banks have complained for years are opaque and subjective, are a central piece of the U.S. regulatory bank-capital structure. How banks perform on the exam informs how much capital they must set aside to meet their obligations and also dictate the scope of dividend payouts and stock buybacks.

Source: Investing.com