Banking Associations Call for Greater Transparency in Fed’s Stress Testing Framework

A group of six banking associations has called for more transparency in the Federal Reserve’s stress-testing framework for bank capital.

The Bank Policy Institute, American Bankers Association, US Chamber of Commerce, Ohio Bankers League and Ohio Chamber of Commerce have argued that the opaque nature of the framework breaches the Administrative Procedure Act (APA).

The act sets out the framework for rulemaking, emphasizing public participation and transparency in the regulatory process. However, the group argued that the stress testing framework lacks both public input and transparency.

The group said:  “By refusing to put its stress-test models and scenarios through public notice and comment — and refusing to fully disclose the models at any point — the board violates the APA, infringes on the public’s right to participate in rulemaking and hobbles its own decision making by depriving itself of the benefit of the public’s input.”

The group also stated that the Federal Reserve's stress test decisions could lead to higher borrowing costs, limiting banks’ ability to help support the economy.

The framework requires banks to maintain hundreds of billions of dollars in capital to protect against a potential economic downturn.

The group argued that when capital requirements are set correctly, they ensure the financial system’s stability. However, if the requirements are set too high or change too much from year to year, they can force banks to hold back too much money, leading to higher lending costs and slower economic growth.

While the group raised concerns about the lack of transparency in the framework, it emphasized that these tests are a crucial part of the overall capital framework, and the legal action does not aim to remove them. Instead, the lawsuit seeks to ensure the methodology is open to public oversight and scrutiny through clear rulemaking.