Big Banks, Business Groups Sue US Fed Over Annual Stress Tests

Major banks and business groups sued the Federal Reserve on Tuesday, alleging the U.S. central bank's annual "stress tests" of Wall Street firms violate the law.
The lawsuit, claims the Fed's practice of determining how big banks perform against hypothetical economic turmoil and assigning capital requirements accordingly, does not follow proper administrative procedure. Plaintiffs included the Bank Policy Institute, the U.S. Chamber of Commerce and the American Bank Association.
The lawsuit marks the latest example of the banking industry growing bolder and challenging in court their regulators' powers. Notably, recent Supreme Court rulings have placed fresh restrictions on administrative authority. The latest ruling in June dealt a major blow to such power by overturning a 1984 precedent that granted deference to government agencies in interpreting laws they administer.
Specifically, the groups are calling for the Fed to make public and subject to feedback the now-confidential models used to gauge bank performance, as well as details of the annual scenarios they create to test for weaknesses.
The groups said they did not want to kill the stress testing program, which provides an annual bill of health to the nation's biggest firms, but argued the process needs to 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 proceed with its lawsuit.
These tests, which banks have complained for years are opaque and subjective, are a central piece of the U.S. regulatory bank-capital structure. The Fed has long resisted calls to open up the testing process, due to concerns that it could make it easier for banks to clear the exams.
How banks perform on the test informs how much capital they must set aside to meet their obligations and dictates the scope of dividend payouts and stock buybacks.

(Source: Reuters)