The American Bankers Association has joined the Bank Policy Institute, Ohio Bankers League and other trade groups in filing litigation against the Federal Reserve, challenging aspects of the stress testing framework the Fed uses to establish certain bank capital requirements.
The lawsuit is focused on the lack of transparency in the current stress testing process, with the groups challenging the “opaque aspects” of the framework and claiming it violates federal laws including the Administrative Procedure Act, which prohibit agencies from regulating in secret. The groups reiterated that they do not oppose stress testing or capital requirements, which they said are “instrumental to the safety and soundness of the U.S. financial system.”
On Dec. 23, the Fed announced that it is considering changes to the bank stress tests and will seek public comment on what it called “significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.” The Fed said it is exploring the change due to “the evolving legal landscape.” In filing Tuesday’s lawsuit, the groups acknowledged the Fed’s announcement as a positive step, but they say the litigation is still needed to preserve the plaintiffs’ legal rights given an upcoming statute of limitations deadline.
ABA has raised concerns about the stress test process in the past, citing a lack of transparency in the process and that it has resulted in higher capital rules that hurt bank lending and economic growth.
“While we support stress testing as an important risk management tool, ABA has long advocated for the Federal Reserve to increase the transparency of its stress testing program, which shields key components like supervisory models from public view,” said ABA President and CEO Rob Nichols. “The opaque nature of these tests undermines their value for providing meaningful insights into bank resilience.” To align with federal law, the Fed should publish the supervisory models and stress scenarios and invite public comment, Nichols said. This would enable banks and the public to “better understand and prepare for regulatory expectations, reducing uncertainty and promoting a fairer, more predictable regulatory environment.” He said ABA is “hopeful” that the Fed will address the issues, but that litigation “preserves our ability to seek legal remedies if the Fed falls short.”
The lawsuit was filed in U.S District Court for the Southern District of Ohio.
