Big Banks Sue the Federal Reserve

What Happened?

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

The Bank Policy Institute, which represents banks like JPMorgan, Citigroup, and Goldman Sachs has joined the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce, and the U.S. Chamber of Commerce to file a lawsuit.

They say it aims to 'resolve longstanding legal violations by subjecting the stress test process to public input as required by federal law.'

Why it Matters

While the banks and businesses have stated they don't oppose the annual stress testing, they believe the process falls short and 'produces vacillating and unexplained requirements and restrictions on bank capital.'

The Fed's stress test is an annual ritual that requires banks to uphold adequate cushions for bad loans and dictates the size of both share repurchases and dividends.

Upon market closure on Monday, the Federal Reserve announced they are seeking to make changes to the bank stress tests and that they will seek public comment on what they deem 'significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.'

The Fed further stated that IT made the decision to alter the tests due to an 'evolving legal landscape,' and cited changes in administrative laws in the past few years. However, IT did not outline any specific modifications to the structure of the annual stress tests.

Although the big banks may view the changes as a net positive, it may be too little too late. Furthermore, the changes may not go far enough to satisfy bank concerns over what they deem as burdensome capital requirements.

What it Means

Groups like the American Bankers Association and the BPI have repeatedly raised concerns about the stress test process in the past, criticizing it as opaque, and stated that the higher capital requirements hurt bank lending and economic growth.

This is not the first issue the groups have had with the Fed this year.

In July, it accused the Federal Reserve of being in violation of the Administrative Procedure Act, due to them not seeking public comment on its stress test scenarios, and the fact that they kept supervisory models a secret.