US banking lobby sues Federal Reserve over stress testing framework

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US banking lobby groups said on Tuesday they had filed a lawsuit against the Federal Reserve over the central bank’s stress testing framework, a major escalation between the industry and regulators.

The announcement comes a day after the Fed announced plans for “significant changes” to its annual stress tests for major U.S. banks in an effort to make the process more transparent and the results less volatile.

“We appreciate the board’s announcement as a first step toward transparency and accountability, but believe it is necessary to file this case to preserve our legal rights,” said Greg Baer, ​​president and chief executive of the industry group Bank Policy Institute, one of Five plaintiffs in the case. It is the first lawsuit that BPI has brought against the Fed.

The Fed declined to comment.

The lawsuit, filed in federal court in Ohio, comes ahead of what lobbyists said was an approaching February deadline to challenge some of the stress testing rules.

It also reflects a more aggressive approach in recent years by the banking sector. In 2023 and 2024, lobby groups waged a combative advertising campaign against the Fed’s proposed implementation of new capital rules, the so-called Basel III Endgame, and lobby groups had threatened to file lawsuits.

The Fed has since scaled back its plans for the Basel III Endgame, and the final outcome will be influenced by the incoming Trump administration.

The industry is now taking aim at stress tests, an annual study to see how well the biggest US banks – including JPMorgan Chase, Goldman Sachs and Bank of America – can withstand a series of catastrophic economic scenarios.

The latest test looked at how banks would handle a 40 percent drop in commercial property prices and a 36 percent drop in house prices.

The Fed uses the results to calculate the overall requirements for bank capital that can be used to absorb losses.

Stress tests played a role in restoring confidence in the banking sector after the financial crisis of 2008. But they have recently been criticized for the lack of transparency over the models used in the process and the volatility of the results each year.

In the lawsuit, the banking groups said they do not oppose annual stress tests, but are pushing for greater visibility into the process and the models used to project bank losses.

The groups said the Fed’s proposed changes to the stress test framework could address industry concerns, but they had filed the suit to keep their options open.

Banks aim to have any changes in place for the 2026 cycle of stress tests.

The majority of the banks’ lawsuit was filed under the Administrative Procedure Act, which sets out how public authorities create and enforce rules. A U.S. Supreme Court ruling earlier this year reined in the agencies’ discretion to draft rules.

The banks are seeking to require the Fed to publish its stress test models and scenarios and allow for public notice and comment on future models.