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US banking lobby groups said on Tuesday they had filed a lawsuit against the Federal Reserve over the central bank’s stress testing framework, a significant escalation between the industry and regulators.
The announcement comes a day after the Fed announced plans for “significant changes” to its annual stress tests for large US banks in an effort to make the process more transparent and the results less volatile.
“We appreciate the board’s announcement as a first step towards transparency and accountability, but believe it is necessary to file this suit to preserve our legal rights,” said Greg Baer, president and chief of the industry group the Bank Policy Institute, one of five plaintiffs in the case. It is the first lawsuit the BPI has filed against the Fed.
The Fed declined to comment.
The lawsuit, filed in a federal court in Ohio, comes ahead of what the lobby groups said was an approaching deadline in February to bring a court challenge to some of the stress test rules.
It also reflects a more aggressive approach in recent years by the banking industry. In 2023 and 2024, lobby groups waged a combative advertising campaign against the Fed’s proposed implementation of new capital rules, the so-called Basel III Endgame, and lobby groups had threatened to bring lawsuits.
The Fed has since scaled back its plans for Basel III Endgame, and the ultimate outcome will be influenced by the incoming administration of Donald Trump.
The industry is now taking aim at stress tests, an annual examination to see how well the largest US banks — including JPMorgan Chase, Goldman Sachs and Bank of America — can withstand a series of catastrophic economic scenarios.
The most recent test looked at how banks would handle a 40 per cent drop in commercial real estate prices and 36 per cent fall in house prices.
The Fed uses the results to calculate the overall requirements for bank capital that can be used to absorb losses.
Stress tests played a role in restoring confidence in the banking sector following the 2008 financial crisis. But they have come under criticism recently for the lack of transparency over the models used in the process and volatility in the results each year.
In the lawsuit, the banking groups said they do not oppose annual stress tests but are pushing for greater visibility into the process and the models used to project bank losses.
The groups said the Fed’s proposed changes to the stress test framework could address the industry’s concerns, but they had filed the lawsuit to keep their options open.
The banks are aiming to have any changes in place for the 2026 cycle of stress tests.
The bulk of the banks’ lawsuit was brought under the Administrative Procedure Act, which stipulates how government agencies create and enforce rules. A US Supreme Court ruling earlier this year reined in agencies’ latitude for rulemaking.
The banks are seeking to require the Fed to publish its stress test models and scenarios, and to allow for public notification and comment on future models.
