Some of the nation’s largest banks and industry groups are reviewing annual “stress tests” to determine how much cash banks need to keep on hand in case of economic turmoil. He has filed a lawsuit against the Federal Reserve Board over the issue.
The Banking Policy Institute, an industry group representing JPMorgan, Goldman Sachs, Citigroup and others, joined the American Bankers Association and other major groups in filing the lawsuit. A lawsuit filed Tuesday in U.S. District Court for the Southern District says the groups do not oppose stress tests, but that the Fed’s “lack of transparency” about how stress tests are conducted poses “significant and unforeseen consequences” for banks. It claims that this will lead to “possible volatility”. of ohio.
“When banks are forced to hold excess capital not to protect against the risk of loss, but to protect against the volatility of private and ever-changing board standards, credit availability declines and economic growth ” and harm American consumers,” the complaint states.
The lawsuit comes as the Federal Reserve and other regulators face pressure from the second Trump administration for “lesser regulation,” Bloomberg reported. The Federal Reserve announced Monday that it is considering major changes to the formula it uses for stress tests.
These changes include soliciting public comment, including from regulated banks, on a hypothetical model the Fed will use to determine how much capital banks should keep readily accessible; may be included. The Fed will also change how it enforces these cash requirements by averaging annual stress test results over two years to “reduce year-over-year volatility” and “reduce the resulting volatility in capital buffer requirements.” possible, the regulator said in a report. statement.
“The Board will continue its exploratory analysis to assess additional risks to the banking system through methods other than stress testing,” the Fed said.
Stress tests were conducted after the Great Recession of 2008 as a way to ensure banks had enough funds to operate during the economic crisis.
The Great Recession was fueled in part by banks extending mortgages to individual borrowers without thorough vetting. When these borrowers were unable to pay their mortgages, many banks did not have enough cash to cover the losses, resulting in a staggering wave of losses. Approximately $245 billion in government funds were released to stabilize banks and financial institutions during the crisis.
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