Major banks and business groups sued the Federal Reserve on Tuesday, alleging that the central bank’s annual “stress tests” on Wall Street companies violate the law.
The lawsuit, filed in U.S. District Court in Columbus, Ohio, alleges that the Fed’s practice of determining large banks’ performance against anticipated economic disruptions and assigning capital requirements accordingly does not follow proper administrative procedures. claims.
Plaintiffs included the Bank Policy Institute, the U.S. Chamber of Commerce, and the American Bankers Association.
The case marks the latest example of the banking industry becoming more bold and challenging the authority of regulators in court, especially following a recent Supreme Court decision that placed new limits on executive authority. are.
In June, the Supreme Court dealt a major blow to these powers, overturning a 1984 precedent that gave government agencies deference in interpreting the laws they control.
The so-called “Chevron Doctrine” required judges to follow reasonable federal interpretations of U.S. laws deemed ambiguous.
The Dodd-Frank Act of 2010, enacted in response to the global financial crisis, broadly requires the Federal Reserve to examine banks’ balance sheets. There is no requirement for the company to direct its own capital to be set aside. By law.
Specifically, the groups will disclose to the Fed details of the now-secret models regulators use to evaluate banks’ performance and the annual scenarios they create to test for weaknesses. and request that they be subject to feedback.
The group said it had no intention of abolishing the stress testing program that provides annual health checks to the nation’s largest companies, but argued the process needed to be more transparent and responsive to public feedback. did.
The Fed announced Monday that it plans to seek similar changes ahead of the 2025 exam, citing recent legislation, but the industry has chosen to proceed with the lawsuit.
A Fed spokesperson declined to comment on the lawsuit Tuesday.
“The opaque nature of these tests undermines their value in providing meaningful insight into banks’ resilience,” Rob Nichols, president and CEO of the American Bankers Association, said in a statement. “
“While we continue to expect the Fed to address long-standing issues with stress testing, this lawsuit preserves our ability to seek legal remedies when the Fed falls short.” Ta.
Banks have long complained that these tests are opaque and subjective, but they have become a central part of U.S. regulators’ bank capital structure.
The Fed has long resisted calls to fully open up the review process, out of concern that it could make it easier for banks to pass.
How a bank performs on this test determines how much capital it must set aside to meet its obligations, and also determines the extent of dividend payments and share buybacks.
