Banking associations and business groups are suing the United States Federal Reserve as they claim that the annual banking stress tests overly restrict bank capital, reported the news portal CNBC on December 24.
Banking associations, including The Bank Policy Institute, which represents big banks like JPMorgan, Citigroup, and Goldman Sachs, the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce, and the U.S. Chamber of Commerce, are suing the banking regulator.
The suit aims to “resolve longstanding legal violations by subjecting the stress test process to public input as required by federal law,” cited the news portal.
The banking groups also said that they are not opposing the annual stress tests but they said the current Fed’s process “produces vacillating and unexplained requirements and restrictions on bank capital.”
What is a stress test?
The US Fed’s stress is an annual event which forces American banks to maintain adequate provisions for bad loans and dictates the size of share repurchases and dividends.
The Federal Reserve, on December 23, announced that it is looking to make changes in the bank’s stress test and will be seeking public comments for it.
Fed called it “significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements,” cited the news portal.
Fed is considering the change due to the evolving legal landscape, but it did not outline any specific modifications to the framework of the annual stress tests, as per the news report.
“These proposed changes are not designed to materially affect overall capital requirements,” said the US Fed cited the news portal.
BPI CEO Greg Baer welcomed the announcement and said, “The Board’s announcement today is a first step towards transparency and accountability,” according to the news report.
Hindting further action Baer also said that “We are reviewing it closely and considering additional options to ensure timely reforms that are both good law and good policy.”
The concerns over the stress test process have been looming for a long time, and claims of the process being opaque have resulted in higher capital rules that hurt the bank’s lending growth.
