Stress test litigation
Bank Policy Institute v. Board of Governors of the Federal Reserve System
Date: March 21, 2025
Issue: Should the district court grant ABA’s motion for summary judgment in its lawsuit claiming the Federal Reserve’s stress testing framework violates the Administrative Procedure Act (APA)?
Case Summary: ABA and its co-plaintiffs (collectively ABA) moved for summary judgment, asking the court to prevent the continued use of the current stress-test framework after the 2025 cycle unless it complies with the APA.
The Fed conducts stress tests using hypothetical economic scenarios and internal models to gauge how banks would perform under stress. The results determine each bank’s “stress capital buffer,” a capital requirement tied to its test performance. Banks must meet this buffer along with other minimum capital standards or face restrictions on dividends and bonus payouts.
In December, ABA sued the Fed in the Southern District of Ohio, arguing its stress test regime violates the APA. The Fed had announced plans to open scenario designs to notice and comment rulemaking. In the complaint, ABA explained the Fed’s changes may address “some if not all” of its concerns over the stress testing process. In any event, ABA filed suit to preserve its legal rights given that the statute of limitations was expiring.
In its motion for summary judgment, ABA argued that the models and scenarios qualify as legislative rules and require notice and comment. Under the APA, agencies must follow a “light-shedding process” before issuing any regulation with the force of law. The models and scenarios carry that force and effect, according to ABA, because they impose binding obligations and alter banks’ legal status.
ABA also argued the Fed violated the Freedom of Information Act (FOIA) and the Due Process Clause by not making the models publicly available. FOIA requires agencies to publish substantive rules of general applicability in the Federal Register, and ABA argued the models qualify because they apply generally across the industry. Separately, ABA argued the Fed’s reliance on undisclosed models violates the Due Process Clause, which demands fair notice of regulatory obligations. By keeping the models secret, the Fed denied banks the notice they are entitled to, according to ABA.
On top of this, ABA argued the Fed acted arbitrarily and capriciously in issuing its 2019 policy statements and 2020 rule. Despite warnings from commenters, the Fed refused to seek public input on its stress-test models and scenarios, offering no clear explanation for its lack of transparency. In ABA’s view, the Fed ignored key concerns about the impact on capital volatility and failed to provide reasoned responses, reinforcing its claim that the Fed disregarded important issues without justification.
For these reasons, ABA urged the court to bar the Fed from using the current stress-test regime to impose capital requirements after the 2025 stress-testing cycle. ABA also urged the court to issue a permanent injunction that would block the Fed from enforcing the stress capital buffer after October 2026 — unless the Fed adopts the models and scenarios through a proper notice-and-comment process.
Bottom Line: The Fed’s reply to ABA’s motion for summary judgment is due April 29, 2025.
Documents: Motion
