The U.S. banking industry has filed a high-stakes lawsuit against the Federal Reserve, targeting the lack of transparency in its stress testing framework. Led by the Bank Policy Institute (BPI), the American Bankers Association (ABA), and other prominent trade groups, the lawsuit marks a significant escalation in the long-standing debate over the Fed’s regulatory processes. Stress tests, implemented after the 2008 financial crisis, are designed to evaluate how well banks can withstand severe economic shocks. While their role in maintaining financial stability is undisputed, critics argue that the Fed’s approach is deeply flawed, with opaque methods and inconsistent results that hinder economic growth.
At the center of the dispute is the Federal Reserve’s refusal to disclose the supervisory models and scenarios used in the tests. This secrecy, the plaintiffs contend, leads to arbitrary and excessive capital requirements, limiting banks’ ability to lend. Greg Baer, President of the BPI, stated that the current framework produces “capital charges that are inaccurate, volatile, and excessive, resulting in reduced lending and economic growth” (ABA, 2024). The effects of these issues ripple beyond the banking sector, raising borrowing costs for households and businesses and slowing job creation. Banks also point to the unpredictability of test results, which complicates long-term capital planning and weakens their ability to support the capital markets that drive 75% of U.S. business and government financing.
The plaintiffs argue that the Federal Reserve’s practices violate the Administrative Procedure Act, which requires federal agencies to allow public input on significant regulatory changes. Instead, the Fed has conducted the tests without publishing its models or inviting public comment, effectively circumventing a legal framework meant to ensure accountability. Rob Nichols, President of the ABA, emphasized the need for reform, stating that “the opaque nature of these tests undermines their value for providing meaningful insights into bank resilience” (ABA, 2024). This lack of transparency not only affects banks’ operational strategies but also raises questions about whether the tests genuinely enhance financial stability.
Timing has added urgency to the lawsuit, as the statute of limitations for challenging parts of the stress testing framework expires in February 2025. By filing now, the banking groups preserve their right to seek legal remedies while pushing for a regulatory overhaul. Although the Federal Reserve recently announced its intent to consider changes, including publicizing supervisory models and seeking input on scenarios by early 2025, the plaintiffs remain unconvinced that these steps will sufficiently address their concerns.
The lawsuit does not aim to eliminate stress testing altogether but seeks a framework that complies with legal standards and enhances economic stability. Trade groups assert that greater transparency would reduce uncertainty, improve regulatory outcomes, and ultimately benefit both the financial system and the broader economy. As this legal challenge unfolds, it highlights the delicate balance between regulatory oversight and the operational realities of the banking sector, with potential consequences for U.S. economic growth and global financial markets.
Banks and Groups Involved in the Lawsuit
The legal challenge against the Federal Reserve is led by several major financial institutions and trade groups. Key participants include:
JPMorgan Chase & Co.
Citigroup Inc.
The Goldman Sachs Group, Inc.
The Bank Policy Institute (BPI)
The American Bankers Association (ABA)
Sources
American Bankers Association. "Banks File Legal Challenge to Flawed Stress Testing Framework." ABA.com, 24 Dec. 2024, www.aba.com/about-us/press-room/press-releases/banks-legal-challenge-flawed-stress-testing.
Gelsi, Steve. "Federal Reserve Proposes More Transparency in Bank Stress Tests, but Banks Still Sue." MarketWatch, 24 Dec. 2024, www.marketwatch.com/story/federal-reserve-proposes-more-transparency-in-bank-stress-tests-but-banks-still-sue-93566abd.
Zacks Equity Research. "Big Banks Sue Fed over Stress Test Transparency." Yahoo Finance, 26 Dec. 2024, finance.yahoo.com/news/big-banks-sue-fed-over-151600715.html.
Comments