Some of the nation’s biggest banks and industry groups are suing the Federal Reserve over the annual “stress tests” it uses to determine how much cash banks are required to keep on hand in case of economic turmoil.
The Bank Policy Institute, an industry group representing JPMorgan, Goldman Sachs, Citigroup and others, joined the American Bankers Association and other major groups to file the suit. The groups said they don't oppose stress tests but that the Fed's “lack of transparency” around how it conducts them translates to “significant and unpredictable volatility” for banks, according to the suit filed Tuesday in the U.S. District Court for the Southern District of Ohio.
“When banks are forced to hold excess capital — not to protect against the risk of loss, but instead to guard against the volatility of the Board’s undisclosed and ever-changing criteria — it reduces credit availability, hinders economic growth, and harms the American consumer,” the suit states.
The suit comes as regulators like the Federal Reserve are facing pressure from a second Trump administration to “regulate with a lighter touch,” Bloomberg reported. On Monday, the Fed announced it was evaluating major changes to the formula it uses for its stress tests.
Those changes could include inviting public comment — including from the banks being regulated — on the hypothetical models the Fed uses to determine how much capital banks need to keep readily accessible. The Fed could also change the way it enforces those cash requirements, by averaging the annual stress test’s result over two years to “reduce year-over-year changes” and “reduce the volatility of resulting capital buffer requirements,” the regulator said in a statement.
“The Board will continue its exploratory analysis, which assesses additional risks to the banking system in ways that are separate from the stress test,” the Fed said.
Stress tests were implemented after the Great Recession of 2008 as a way to ensure banks have enough money to operate during economic crises.
The Great Recession was spurred in part by banks giving home mortgage loans to individual borrowers without much vetting. When those borrowers couldn’t pay their mortgages, many banks didn’t have enough cash to cover the loss, resulting in a wave of staggering losses. Roughly $245 billion in government funds were committed to stabilize banks and financial institutions amid the crisis.
