Banks sue Federal Reserve in challenge to stress tests

financialpost.com:

The United States Federal Reserve doesn’t allow for appropriate public input when designing bank stress tests, bank trade groups said in a lawsuit seeking to force the central bank to open the design of the tests to public comment.

The suit, filed Tuesday in the U.S. District Court for the Southern District of Ohio, doesn’t seek to eliminate the annual stress testing and capital planning requirements that have been in place since 2009 as part of the government’s response to the 2008 financial crisis.

Instead, the Bank Policy Institute (BPI), the American Bankers Association (ABA), the U.S. Chamber of Commerce, and two local Ohio trade groups are seeking to open up the scenario design, where the Fed measures bank capital and liquidity levels against a hypothetical recession. The trade groups also want input through the notice and comment rulemaking process on models used to determine capital changes and other aspects of the stress testing process.

“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, resulting in reduced lending and economic growth,” BPI chief executive Greg Baer said in a statement.

The lawsuit doesn’t seek to mandate changes to or stop the upcoming 2025 stress testing process or alter capital planning requirements put in place following the 2024 exams.

The Fed declined to comment.

Results of the Fed’s stress tests can have a major impact on bank finances.

The Fed uses results to set stress capital buffers mandated to protect against financial shocks. The central bank can also reject stock buybacks and dividend payments for banks that perform