Federal Reserve faces lawsuit from big banks, business groups: What to know

What’s New

Groups representing banks and businesses, including the Bank Policy Institute, have filed a lawsuit on Tuesday against the Federal Reserve for violating federal law with the “opaque aspects of the stress testing framework.”

“For years, we have highlighted serious concerns about the stress testing framework and the need for reform,” Greg Baer, the president and CEO of the Bank Policy Institute, said in a press release. “The current opaque regime, combined with the lack of clear standards for the global market shock and the operational risk charge, continues to produce capital charges that are inaccurate, volatile and excessive, resulting in reduced lending and economic growth.”

Newsweek reached out to the Federal Reserve for comment. Eric Kollig, who is a part of the Federal Reserve Board, responded that his organization doesn’t “have anything to share at this time.”

Why It Matters

The lawsuit centers around the annual “stress test” used by the Board of Governors of the Federal Reserve System. The test sets certain bank capital requirements to withstand potential severe economic shock.

Stress testing directly impacts American households and businesses by slowing job growth and hindering capital markets while raising the cost of credit, according to the press release.

What To Know

Stress testing, imposed in 2008 after the global financial crisis, identifies potential vulnerabilities within banks and ensures they have enough capital if there is an economic shock.

The court documents note that the banking groups have looked for the Board of Governors to improve this process for a while now.

The banking groups noted in the lawsuit that they do “not oppose stress testing or capital requirements,” but that they “have a great impact on the cost of financial services for all Americans.”

“Federal regulations in an area this consequential should be adopted in a manner that complies with the requirements Congress laid down to ensure fair, rigorous rulemakings and rational results,” the lawsuit—which was filed by the Bank Policy Institute, along with the American Bankers Association, the U.S. Chamber of Commerce, the Ohio Bankers League and the Ohio Chamber of Commerce—reads. “The current stress-testing process falls short of these requirements.”

At this time, the public is not offering their opinion on the stress test, as required by federal law.

“…the Federal Reserve’s stress testing framework violates both the Constitution and federal statutes such as the Administrative Procedure Act, which prohibit agencies from regulating in secret,” the press release reads. “The Federal Reserve conducts its stress tests without providing transparency into its models or scenarios.”

The Administrative Procedure Act requires public notices and comments for significant changes. Each year, the Federal Reserve changes the minimum capital a bank must hold without public notice, according to the press release.

The Bank Police Institute, which represents large banks like JPMorgan Chase, Citigroup and Goldman Sachs, suggested that the current Federal Reserve framework leads to higher borrowing costs for banking customers. This in turn hurts local governments and businesses even though 75 percent of financing for U.S. businesses and government come from the capital markets.

On Monday, the Federal Reserve announced that it was considering changes to the stress test to improve transparency, citing an “evolving legal landscape.” The Bank Policy Institute called this an “important first step.”

What People Are Saying

Rob Nichols, president and CEO of the American Bankers Association, in a press release: “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. The opaque nature of these tests undermines their value for providing meaningful insights into bank resilience. To meet federal law, the Fed should publish the supervisory models and stress scenarios and invite public comment, which would enable banks and the public to better understand and prepare for regulatory expectations, reducing uncertainty and promoting a fairer, more predictable regulatory environment.”

Michael Adelman, president and CEO of the Ohio Bankers League, in a press release: “By bringing these issues to court, we are advocating for a fairer, more transparent framework that will allow our financial institutions to better serve Ohio families and businesses while promoting economic stability. This litigation is not about eliminating the stress tests but ensuring that the process is both legally sound and effective in promoting a healthy, growing economy.”

Tom Quaadman, senior vice president of economic policy for the U.S. Chamber of Commerce, in a press release: “Main Street businesses drive growth and job creation throughout the economy. Many of those Main Street businesses rely on bank lending to fuel that growth and manage their finances. The current stress test regime acts as a regulation and restricts business financing.”

Steve Stivers, president and CEO of the Ohio Chamber of Commerce, in a press release: “The American people deserve a fair and transparent process of stress testing for banks. The current system restricts access to capital for businesses and families, thus killing jobs and the American dream.”

What Happens Next

The statute of limitations is February of 2025, so the groups said they have “no choice but to file this lawsuit in order to preserve our legal rights” on Tuesday.

The lawsuit is in hopes of ensuring that “beginning in 2026” the Board of Governors will bring the “components of the stress test to public notice and comment and complies with other applicable legal requirements.”