Major banks and business groups filed a lawsuit against the Federal Reserve on Tuesday, alleging that its annual “stress tests” violate federal law.
The lawsuit, submitted to the U.S. District Court in Columbus, Ohio, contends that the Fed’s process for assessing how large banks would fare under hypothetical economic scenarios, and assigning capital requirements based on those evaluations, fails to adhere to proper administrative procedures.
The plaintiffs include the Bank Policy Institute, the U.S. Chamber of Commerce, and the American Bankers Association. They argue that while the 2010 Dodd-Frank Act mandates the Fed to test banks’ balance sheets, it does not specifically require the capital adequacy analysis or the resulting capital directives issued by the central bank.
The lawsuit comes amid heightened tensions between the banking industry and regulatory authorities, bolstered by recent Supreme Court rulings curbing administrative powers. In June, the Supreme Court overturned the “Chevron doctrine,” a 1984 precedent that had required courts to defer to federal agencies’ interpretations of ambiguous laws. The decision has emboldened industries to challenge regulatory practices in court.
The groups are seeking greater transparency in the Fed’s testing process, calling for the public release and feedback on the confidential models used to evaluate bank performance and details of the annual stress-test scenarios. While the plaintiffs emphasize they do not aim to eliminate the stress testing program, which assesses the financial health of major banks, they argue that the current process lacks sufficient openness and accountability.
“The opaque nature of these tests undermines their value for providing meaningful insights into bank resilience,” Rob Nichols, president and CEO of the American Bankers Association, said in a statement. “We remain hopeful the Fed will address long-standing issues with the stress tests, but this litigation preserves our ability to seek legal remedies if the Fed falls short.”
On Monday, the Fed announced plans to implement similar changes ahead of the 2025 exams, citing recent legal developments. However, the banking groups proceeded with the lawsuit. A Fed spokesperson declined to comment on the litigation.
The stress tests, which have faced criticism for being opaque and subjective, play a central role in determining how much capital banks must hold to meet obligations. They also influence decisions on dividend payouts and stock buybacks. While banks have long sought a more open process, the Fed has resisted full disclosure, citing concerns that it could enable firms to game the system and undermine the tests’ effectiveness.
