Banks And Business Groups Challenge Fed's Stress Test Rules

Major U.S. banks, including JPMorgan Chase JPM, Bank of America BAC, and Citigroup C, filed a lawsuit against the Federal Reserve on Tuesday, challenging the transparency of its annual stress test procedures.

Leading banking and business organizations, including the Bank Policy Institute (BPI), American Bankers Association (ABA), U.S. Chamber of Commerce, Ohio Bankers League, and Ohio Chamber of Commerce, joined the lawsuit against the Federal Reserve. These tests, which assess banks’ resilience during economic crises, are a cornerstone of financial risk management. However, the plaintiffs argue that the current system violates federal law by excluding required public input.

The litigation addresses long-standing concerns about the opacity of the Federal Reserve’s stress testing procedures, which the plaintiffs claim lead to excessive and volatile capital requirements. These charges, they say, hinder banks’ ability to lend, support households and businesses, and contribute to economic growth. While acknowledging the importance of stress testing, the groups emphasize the need for reforms to create a fairer and more predictable regulatory environment.

Greg Baer, CEO of the BPI, stated that the current regime results in inaccurate and excessive capital charges, which reduce lending and stifle economic growth.

Rob Nichols, CEO of the ABA, criticized the stress tests for shielding critical supervisory models from public scrutiny.

Michael Adelman, CEO of the Ohio Bankers League, stressed that the lawsuit is about enforcing compliance with federal laws.

Tom Quaadman of the U.S. Chamber of Commerce highlighted the detrimental effects of the current system on small businesses, which rely on bank lending for growth.

The lawsuit follows the Fed’s recent announcement to overhaul its stress test regime and seek public input on proposed changes in early 2025, the Wall Street Journal reports.

The lawsuit highlights the economic implications of unexpected capital burdens, stating they could impose “billions of dollars” in costs and negatively impact the broader economy.

The banks also noted that a statute of limitations on stress-test rule changes will expire in February, prompting their decision to file the suit now.

The latest test assessed how banks would manage a 40% decline in commercial real estate prices and a 36% drop in house prices.

The Federal Reserve evaluates these results to determine the total capital banks need to absorb potential losses, the Financial Times reports.

Since the 2008 financial crisis, banks have faced increased regulatory scrutiny, including stringent capital requirements.

Executives like Jamie Dimon of JPMorgan Chase and Brian Moynihan of Bank of America have criticized these rules for driving financial activities into less transparent markets.

The Federal Reserve’s Vice Chair for Supervision, Michael Barr, had proposed raising capital requirements for large banks but delayed those plans following industry opposition.

Six leading U.S. banks, including JPMorgan Chase, Bank of America, Wells Fargo & Company WFC, and Citigroup repurchased over $14 billion in shares in the first quarter.

In June, Bank of America analyst Ebrahim H. Poonawala criticized the Federal Reserve’s stress test process, highlighting its “inherent opacity.” These evaluations, which assess banks’ resilience under severe economic scenarios, revealed varying impacts on capital requirements. Poonawala noted that while banks demonstrated adequate buffers, the tests showed higher-than-expected losses.

In June, JPMorgan analyst Vivek Juneja analyzed the Federal Reserve’s annual stress test results, highlighting larger-than-expected increases in stress capital buffers for major banks. He noted that the elevated capital requirements could delay or reduce long-term capital return strategies for these institutions.

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