Major Banks Plan to Sue the Fed Over Annual Stress Tests

According to an informed source, the largest banks are planning to sue the Fed over annual bank stress tests. The individual mentioned that the lawsuit is expected to be filed within this week. The Fed's stress test is an annual ritual that forces banks to maintain sufficient buffers for bad loans and determines the scale of share buybacks and dividends.

In a statement after market close on Monday, the Fed announced its intention to make changes to the bank stress tests and would seek public input on what it described as "significant changes" aimed at increasing the transparency of bank stress tests and reducing the volatility of the resulting capital buffer requirements.

The Fed cited the "evolving legal environment" as a reason for its decision to modify the tests, referring to changes in administrative laws in recent years. No specific changes have been made to the framework of the annual stress tests.

While large banks view these potential changes as a win, it may be too late in the process. Additionally, the changes may not go far enough to address the banks' concerns regarding heavy capital requirements.

Greg Baer, CEO of the Bank Policy Institute (BPI), which represents major banks such as JPMorgan, Citigroup, and Goldman Sachs, welcomed the Fed's announcement, stating, "The Board’s announcement today is a first step toward transparency and accountability."