Banks Prepare to Take on the Federal Reserve
In a bold move, major banks are gearing up to sue the Federal Reserve over the annual bank stress tests, according to a source familiar with the matter. The lawsuit is expected to be filed as early as Tuesday morning.
The Stress Test Saga
The Federal Reserve’s stress test is an annual ritual that forces banks to maintain adequate cushions for bad loans and dictates the size of share repurchases and dividends. However, banks have long complained that the process is opaque and results in higher capital rules that hurt bank lending and economic growth.
A Step Towards Transparency?
In a surprise move, the Federal Reserve announced on Monday that it is seeking to make changes to the bank stress tests, citing the need for greater transparency and reduced volatility in capital buffer requirements. While the big banks may view this as a win, it remains to be seen whether the changes will go far enough to address their concerns.
Banks Remain Skeptical
Greg Baer, CEO of the Bank Policy Institute, which represents major banks like JPMorgan, Citigroup, and Goldman Sachs, welcomed the Fed’s announcement but hinted at further action. “We are reviewing it closely and considering additional options to ensure timely reforms that are both good law and good policy,” Baer said.
A Long-Standing Dispute
Groups like the BPI and the American Bankers Association have raised concerns about the stress test process in the past, accusing the Fed of violating the Administrative Procedure Act by not seeking public comment on its stress scenarios and keeping supervisory models secret.
What’s Next?
As the banks prepare to take on the Federal Reserve, it remains to be seen what changes will be made to the stress test process. One thing is certain, however: the outcome will have significant implications for the banking industry and the broader economy.
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