US banking lobby sues Federal Reserve over stress testing framework

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U.S. banking lobby groups said Tuesday they had filed a lawsuit against the Federal Reserve over the central bank stress testing framework, a major escalation between the industry and regulators.

The announcement comes a day after the Fed announced plans to significantly change its annual stress tests for major U.S. banks, aiming to make the process more transparent and the results less volatile.

We appreciate the board's announcement as a first step toward transparency and accountability, but believe it is necessary to take this legal action to preserve our legal rights, said Greg Baer, ​​president and CEO. head of the industry group Bank Policy Institute, one of five plaintiffs in the case. This is the first lawsuit filed by the BPI against the Fed.

The Fed declined to comment.

The lawsuit, filed in federal court in Ohio, comes ahead of what advocacy groups have said is a February deadline to challenge some of the stress testing rules in court.

It also reflects a more aggressive approach by the banking sector in recent years. In 2023 and 2024, advocacy groups waged a combative advertising campaign against the Fed's proposed implementation of new capital rules, called Basel III Endgame, and advocacy groups threatened lawsuits.

The Fed has since scaled back its plans for the final phase of Basel III, and the final outcome will be influenced by the new Trump administration.

The industry is now tackling stress testing, an annual examination aimed at determining how well America's largest banks, including JPMorgan Chase, Goldman Sachs and Bank of America, can withstand a range of catastrophic economic scenarios.

The most recent test examined how banks would respond to a 40 percent drop in commercial real estate prices and a 36 percent drop in property prices.

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

Stress testing played a role in restoring confidence in the banking sector after the 2008 financial crisis. But it has recently been criticized for the lack of transparency over the models used in the process and the volatility of the results each year .

In their complaint, the banking groups said they did not oppose annual stress tests but were calling for greater visibility into the process and models used to project bank losses.

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

Banks aim to implement changes for the 2026 stress test cycle.

The bulk of the lawsuits against the banks have been filed under the Administrative Procedure Act, which stipulates how government agencies create and enforce rules. A U.S. Supreme Court ruling earlier this year limited agencies' rulemaking latitude.

The banks are seeking to require the Fed to publish its models and stress test scenarios, and to allow public notification and comment on future models.

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