Sources say that several of the largest Banks in the USA plan to sue the Federal Reserve over the annual bank stress tests.
Despite the Federal Reserve stating that it is considering changes to bank stress tests, some of the largest banks in the USA may still be dissatisfied.
According to a source familiar with the matter, several of the largest banks are planning to sue the Federal Reserve regarding the annual bank stress tests. The source indicated that the lawsuit is expected to be filed this week, possibly as early as Tuesday morning local time (Tuesday evening Peking time).
The Federal Reserve's stress tests are an annual routine that requires banks to maintain sufficient buffers for bad loans and stipulates the scale of Share Buybacks and dividends.
These tests were established in the aftermath of the 2007-2009 financial crisis to assess whether large lending institutions can withstand economic shocks. They are central to the USA's capital regime, dictating how much Cash / Money Market lenders must set aside to absorb losses and how much can be returned to Shareholders.
After the market closed on Monday, the Federal Reserve announced in a statement that it is considering changes to bank stress tests and will seek public input on what it calls 'significant changes to improve the transparency of bank stress tests and reduce the volatility of the resulting capital buffer requirements.'
The Federal Reserve indicated that the decision to change the tests was due to the 'evolving legal environment,' referring to changes in administrative law in recent years. It did not outline any specific changes to the annual stress test framework. While large banks may view these changes as a victory, it may be too late, as these changes may not meet all their needs.
Additionally, these changes may not be sufficient to address banks' concerns about heavy capital requirements. According to the Federal Reserve, these proposed changes will not have a substantial impact on overall capital requirements.
Greg Baer, CEO of the Banking Policy Institute (BPI), representing large Banks like JPMorgan, Citigroup, and Goldman Sachs, welcomed the Federal Reserve's statement, saying in a statement: "Today's statement from the Federal Reserve is the first step towards transparency and accountability."
However, Baer also hinted that further action may be necessary: "We are carefully reviewing and considering other options to ensure timely reforms that are both legal and policy-compliant."
Organizations like BPI and the American Bankers Association have previously expressed concerns about the stress testing process, arguing that it is opaque and leads to higher capital requirements, which harms Banks' lending and economic growth.
In July of this year, these organizations accused the Federal Reserve of violating the Administrative Procedure Act, as it did not seek public input on its stress scenarios and kept regulatory models confidential.
Editor/Rocky