Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—S.D. Ohio: ABA, other groups seek summary judgment in legal challenge to stress testing requirements, (Mar 24, 2025)

By Jeff Williams

The motion asks the court to declare that the Fed did not properly seek public comment about the stress tests and for a permanent injunction against the Fed enforcing its stress-capital buffer after October 2026.

The American Bankers Association, the U.S. Chamber of Commerce, Bank Policy Institute, the Ohio Bankers League, and the Ohio Chamber of Commerce have filed a motion for summary judgment in their lawsuit challenging the Federal Reserve Board’s annual stress testing requirements as unduly onerous and failing to provide adequate guidance to financial institutions. The groups filed the lawsuit in December in the U.S. District Court for the Southern District of Ohio (see Banking and Finance Law Daily, Jan. 2, 2025). In the motion filed Friday, the industry groups alleged that the Fed makes the “enormously important policy decisions” about the parameters of the stress tests through a “secretive process that eschews the disclosure and public participation required by the Administrative Procedure Act [APA] and other fundamental principles of administrative law and democratic government.” (Bank Policy Institute v. Board of Governors of the Federal Reserve System, No. 2:24-cv-04300 (S.D. Ohio Mar. 21, 2025)).

According to the groups, the Fed’s procedures for conducting stress tests and imposing stress-capital buffers "trample” on the public notice requirements of the APA, resulting in a “secret-law regime” with rules that “were neither reasonable nor reasonably explained.” The groups added that “[t]he Board itself has acknowledged that its current regime is untenable, but has failed to take the concrete steps needed to ensure the stress tests comply with the law going forward. Accordingly, this Court’s intervention is necessary.”

Because they “posit hypothetical, worst-case scenarios” and “then use economic models develop developed and overseen by Board staff to predict how banks will fare in this hypothetical economic crisis,” changes to the models and scenarios used in the stress tests "result in directives to banks that can vary widely from year to year, imposing tens of billions of dollars in unexpected new capital burdens on banks, sometimes due solely to undisclosed, unexplained changes in the Board’s internal methodology,” the industry groups argued. Banks then “have little choice but to hold still more capital, lest they be caught short by a change in the Board’s methodology,” the groups said.

The Fed “effectively acknowledged” in December that the “stress-test regime is legally suspect” when it said it plans to implement “significant” changes to the stress tests, including seeking public comment, the industry groups said. While they said they do not oppose stress tests or stress-capital requirements, the groups said, the lawsuit seeks to ensure that “going forward—beginning in 2026 at latest—the Board ceases using the current, unlawful stress-test regime and instead follows a transparent process commensurate with the tests’ importance.”

To ensure that the Board has “ample time” to implement changes to the stress tests in time for the 2026 cycle, the industry groups asked the judge to issue a decision regarding the motion by Oct. 31, 2025.

The groups’ arguments included that the Fed did not follow the proper APA notice and comment process when it promulgated the stress test rules models and scenarios that amount to legislative rules that imposed “hundreds of billions of dollars in capital requirements with the force and effect of law.”

Further, they said, the requirements are legislative rules subject to notice and comment under the APA because they are “time-consuming and costly, come with penalties for non-compliance" and "impose sweeping consequences on banks and the broader economy.... The APA entitles the public to participate in the development of those judgments, yet the Board’s analysis and decision-making are hidden from public view.”

The stress test framework also implements “express statutory delegations” regarding capital requirements under the Dodd-Frank Act that activate the notice and comment requirements of the APA, the groups said.

The Fed also failed to properly publish the supervisory models and stress scenarios and invite public comment, violating banks’ rights to due process, they said. “The Board’s refusal to tell banks, in advance, how it evaluates their performance in the stress tests deprives them the opportunity to conform their conduct to the Board’s criteria and thereby avoid unduly high capital restrictions (and unwarranted volatility in their capital requirements),” the groups said.

Attorneys: James A. King (Morris & Arthur LLP) for Bank Policy Institute. Joshua Paul Chadwick for Board of Governors of the Federal Reserve System.

Companies: American Bankers Association; Bank Policy Institute, Ohio Bankers League; Ohio Chamber of Commerce; U.S. Chamber of Commerce

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