Biggest banks sue Federal Reserve over annual stress tests

A group of banks and business groups is suing the Federal Reserve over the annual bank stress tests.

The Bank Policy Institute, which represents major banks such as JPMorgan, Citigroup and Goldman Sachsjoins the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce and the US Chamber of Commerce in filing the suit, which they said aims to “resolve long-standing violations by exposing the stress testing process to public input as required by federal law.” “

The groups said they are not opposed to stress tests, but that the current process falls short and “creates vacillating and unexplained requirements and restrictions on bank capital.”

CNBC previously reported on the plans to file suit.

The Fed’s stress test is an annual ritual that forces banks to maintain adequate cushions for bad loans and dictates the size of share buybacks and dividends.

After the market closed on Monday, the Federal Reserve announced in a statement that it is looking to make changes to the bank stress tests and will seek public comment on what it calls “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 decided to change the tests because of “the evolving legal landscape,” pointing to changes in administrative law in recent years. It did not outline any specific changes to the framework for the annual stress tests.

While the big banks will likely see the changes as a win, it may be too little too late.

Furthermore, the changes may not go far enough to address banks’ concerns about onerous capital requirements. “These proposed changes are not designed to materially affect overall capital requirements,” according to the Fed.

BPI CEO Greg Baer welcomed the Fed’s announcement, saying in a statement: “The Board’s announcement today is a first step toward transparency and accountability.”

But Baer also hinted at further action, “We are reviewing it carefully and considering additional options to ensure timely reforms that are both good law and good policy.”

Groups such as the BPI and the American Bankers Association have previously raised concerns about the stress-testing process, arguing that it is opaque and has resulted in higher capital rules that hurt bank lending and economic growth.

In July, the groups accused the Fed of violating the Administrative Procedure Act because it did not seek public comment on its stress scenarios and kept supervisory models secret.

Read the details of the complaint here.

— CNBC’s Hugh Son contributed to this report.