Federal Reserve Proposes More Transparency in Bank Stress Tests, but Banks Still Sue

Bank industry groups file lawsuit against the U.S. Federal Reserve's stress-test scenarios may be unrealistic.

Trade groups representing the largest U.S. banks on Tuesday filed suit in federal court to force more transparency in the U.S. Federal Reserve's bank stress tests imposed after the 2008 global financial crisis, but the Fed has already proposed some changes to the annual process.

The complaint in U.S. District Court for the Southern District of Ohio alleges that the Fed's stress-test scenarios may be unrealistic and said the capital requirements imposed on banks as a result of the annual process constrain lending which would help the economy.

The American Banks Association, along with the Bank Policy Institute, the U.S. Chamber of Commerce, and the Ohio Bankers League seek to subject the stress-test process to public input as required by federal law, the plaintiffs said.

"Stress testing has direct implications on banks' ability to support American households and businesses and harms the U.S. economy by slowing job growth, hindering capital markets intermediation and raising the cost of credit," the industry group said in a statement.

The act of suing the U.S. Federal Reserve marks a rare move by various bank industry trade groups, but it's not unheard of.

The FDIC, the U.S. Federal Reserve and the Office of the Comptroller of the Currency are currently facing a lawsuit over a multi-year update of the Community Reinvestment Act, for example.

The plaintiffs praised a fresh move by the Fed to propose changes to the stress-test procedures, but said they decided to move ahead with the lawsuit given the uncertain outcome of any changes.

While the trade groups said the move won't disrupt the coming stress tests in 2025, they are targeting changes by 2026.

While the Fed's proposal aired late Wednesday was encouraging, they moved ahead with filing the lawsuit, the trade groups said.

A spokesperson for the Federal Reserve declined to comment on the suit.

Late Tuesday, the U.S. Federal Reserve said it plans to propose changes including disclosing and seeking public comment on "all of the models that determine the hypothetical losses and revenue of banks under stress."

The Fed said it would allow public comment on its hypothetical scenarios used annually for the test, before the scenarios are finalized.