US banking agency sues Federal Reserve over stress testing plan

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US banking groups said on Tuesday they had filed a lawsuit against the Federal Reserve over the stress test plan, a major escalation between the industry and regulators.

The announcement comes a day after the Fed published projects for “significant changes” to its annual stress tests for major US banks in an effort to make the process more transparent and less impactful.

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

The Feed declined to comment.

The lawsuit, filed in Ohio federal court, comes ahead of what travel groups say is a looming January deadline to bring a court challenge to some of the stress test regulations.

It is also more reflective aggressive approach in recent years it is the banking industry. In 2023 and 2024, lobbying groups waged a war ad campaign against the Fed’s proposed implementation of new capital rules, the so-called Basel III Endgame, and lobbying groups were to bring cases.

The Fed has been toning down its plans for the Basel III Endgame, and the final outcome will be influenced by the incoming Trump administration.

The industry is now preparing for stress tests, an annual test to see whether the biggest US banks – including JPMorgan Chase, Goldman Sachs and Bank of America – can withstand a series of defaults. the economy is dangerous.

The recent test looked at how banks would deal with a 40 percent drop in real estate prices and a 36 percent drop in house prices.

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

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

In the lawsuit, banking groups said they are not opposed to annual stress tests but are pushing for greater visibility into the processes and methods used to generate bank losses.

The groups said the Fed’s proposed changes to the stress testing framework could solve the industry’s problems, but they filed a lawsuit to keep their options open.

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

Most of the banking cases were brought under the Administrative Procedure Act, which defines how government agencies create and enforce laws. A decision by the United States Supreme Court earlier this year reined in agencies ‘latitude for rulemaking.

The banks want to require the Fed to publish its stress test models and standards, and to allow public notice and comment on future models.