Major banks and trading groups sued the Federal Reserve on Tuesday, alleging the central bank’s annual “stress testing” of Wall Street firms violates the law.
The lawsuit, filed in U.S. District Court in Columbus, Ohio, claims the Fed’s practice of determining how large banks perform against hypothetical economic turmoil and specifying capital requirements accordingly does not follow proper administrative procedure. Does it.
The plaintiffs included the Bank Policy Institute, the US Chamber of Commerce, and the American Bank Association.
The lawsuit is the latest example of the banking industry’s increasing boldness and willingness to challenge the powers of its regulators in court, especially in the wake of recent Supreme Court decisions imposing new restrictions on administrative authority.
In June, the Supreme Court dealt a major blow to such power by overturning a 1984 precedent that gave government agencies deference in interpreting the laws they administer.
said “Chevron Principle” Had called on judges to defer to reasonable federal agency interpretations of US laws deemed ambiguous.
While the 2010 Dodd-Frank law passed after the global financial crisis broadly requires the Fed to test banks’ balance sheets, as part of the test the Fed conducts a capital adequacy analysis, or the resulting capital analysis that lenders require Instructs to keep, not mandated by law.
Specifically, the groups are asking the Fed to make public and subject to feedback the confidential models they use to measure the regulator’s bank performance, as well as the annual reports they create to test vulnerabilities. Also give details of the scenarios.
The groups said they don’t want to eliminate the stress testing program, which provides an annual bill of health to the nation’s largest companies, but argue that the process should be more transparent and responsive to public feedback.
On Monday, the Fed announced plans to pursue similar changes ahead of the 2025 exams, citing recent legal developments, but the industry opted to move forward with its lawsuit.
A Fed spokesperson declined to comment on the lawsuit Tuesday.
“The opaque nature of these tests diminishes their importance in providing meaningful insight into bank resilience,” Rob Nichols, president and CEO of the American Bankers Association, said in a statement.
“We remain hopeful that the Fed will address long-standing issues with stress tests, but this lawsuit preserves our ability to seek legal remedies if the Fed fails.”
These tests, which banks have complained for years are opaque and subjective, are a central part of the US regulatory bank-capital structure.
The Fed has long resisted calls to completely open up the testing process, out of concerns that it could make it easier for banks to pass the tests.
How banks perform in the test determines how much capital they must set aside to meet their obligations and the scope of dividend payments and stock buybacks.
