Washington, D.C. – A lawsuit brought by several leading bank trade groups against the Federal Reserve is pushing for a swift legal decision over the central bank’s approach to stress testing. These groups, eager to implement changes in time for the next examination cycle, are arguing that the Fed’s practices have not been transparent and fall short of legal standards.
Late last week, the Bank Policy Institute, American Bankers Association, and Ohio Bankers League put forward a motion for a summary judgment, urging a decisive ruling based on the existing evidence. They propose this to avoid a prolonged trial, while still expressing a desire for oral arguments to aid the court’s deliberations.
The banking associations have requested the court make its decision by October 31. Their timing aims to ensure that the Federal Reserve can enact necessary reforms before the 2026 stress testing cycle begins. Such a schedule would provide the Fed a three-month period to revise its protocols following the scenario release scheduled for early next year.
The crux of the lawsuit, initiated last Christmas Eve, is the allegation that the Federal Reserve has contravened the Administrative Procedures Act. The groups criticize the Fed for not publicly disclosing the internal models used in annual banking stress tests, which they argue deprives stakeholders of the ability to comment and engage with the process constructively.
The annual stress tests conducted by the Federal Reserve are designed to assess how banks would handle severe economic downturns, using adverse scenarios to inform necessary capital reserves. Results directly influence the stress capital buffer requirements, additional capital large banks must hold as a precaution against potential financial upheavals.
Despite affirmations of support for stress tests and related capital measures, the banking organizations maintain that current methodologies are overly restrictive, curbing their capacity to lend and thereby stifling economic growth.
Historically, the Fed has resisted disclosing its models, arguing this could lead institutions to manipulate the outcomes of the tests. However, a shift in stance has been observed recently, reflecting broader changes in administrative law that advocate less deference to regulatory agencies.
Federal Reserve Chair Jerome Powell, in a statement earlier this year, indicated plans to enhance transparency by releasing these models for public review before implementing annual stress tests. Yet, as the banking groups emphasize in their filing, promises alone are insufficient as current practices remain unchanged.
The lawsuit highlights that while preparations for the 2025 stress tests are advancing under existing frameworks, no concrete proposals have been made public for the 2026 cycle, which is looming. This underscores a critical gap between the Fed’s commitments to transparency and its actions, according to the filings.
As these legal proceedings unfold, the financial sector watches closely, recognizing that the outcome could significantly influence the regulatory landscape governing major banks in the United States.
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