Federal Reserve Lawsuit: Banks Sue Over Stress Tests
The Federal Reserve is being sued by a number of banks and industry associations for the yearly bank stress testing.
Along with the American Bankers Association, Ohio Bankers League, Ohio Chamber of Commerce, and U.S. Chamber of Commerce, the Bank Policy Institute, which represents major banks such as JPMorgan, Citigroup, and Goldman Sachs, is filing the lawsuit, stating that its goal is to “resolve longstanding legal violations by subjecting the stress test process to public input as required by federal law.”
According to the groups, stress testing is not inherently bad, but the existing procedure is inadequate and “produces vacillating and inexplicable requirements and limits on bank capital.”
The preparations to pursue a lawsuit were previously disclosed by CNBC.
The Fed’s yearly stress test determines the size of share repurchases and dividends and compels banks to keep sufficient buffers for bad loans.
The Federal Reserve said in a statement following Monday’s market close that it aims to make “significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements” and will be soliciting public feedback on the proposed changes.
The Fed cited recent modifications to administrative statutes when stating that it decided to update the standards due to “the shifting legal landscape.” No particular changes to the structure of the yearly stress tests were described.
It might be too little, too late, even if the major banks will probably see the adjustments as a victory.
Furthermore, the changes could not go far enough to allay the banks’ worries about excessive capital requirements. The Fed states that “these proposed modifications are not intended to appreciably affect overall capital requirements.”
“The Board’s announcement today is a first step towards transparency and accountability,” said Greg Baer, CEO of BPI, in a statement praising the Fed’s action.
“We are analyzing it attentively and contemplating further alternatives to achieve timely improvements that are both good law and good policy,” Baer said, hinting at additional action.
In the past, organizations such as the American Bankers Association and the BPI have expressed concerns about the stress test procedure, arguing that it is opaque and has led to stricter capital requirements that have hampered economic growth and bank lending.
The groups charged in July that the Fed had violated the Administrative Procedure Act by failing to solicit public input on its stress scenarios and by keeping supervisory models confidential.
