Banking Group Challenges Legality of Stress Tests (1 Viewer)

[cstu]

Just got this lovely item in my inbox...looks like the banks are at it again.

Key components of the Federal Reserve's annual stress tests for big banks likely are illegal because they fail to comply with the Administrative Procedure Act of 1946, according to a white paper released Sept. 15 by the Committee on Capital Markets Regulation, a nonprofit comprised of banking executives.

THE ADMINISTRATIVE PROCEDURE ACT AND FEDERAL RESERVE STRESS TESTS (Enhancing Transparency) - PDF

The Administrative Procedure Act of 1946 (the “APA”) imposes a set of uniform procedural requirements on federal agencies, requiring that: (a) agencies provide the public notice of proposed rules and an opportunity to comment on them (“notice-and-comment procedures”)2; (b) agencies publish their final rules3; and (c) agency actions be subject to judicial review and reversal if they fail to comply with the APA’s procedural requirements or are otherwise arbitrary and capricious.4 The objective of the APA is to “achieve relative uniformity in the administrative machinery of the federal government,”5 and to “ensure[] that the massive federal bureaucracy remain tethered to those it governs.”6

However, the Federal Reserve (“Fed”) has likely not complied with the APA’s procedural requirements in adopting key aspects of its Comprehensive Capital Analysis and Review (“CCAR”) stress tests that quantify whether under future adverse economic conditions a bank can maintain sufficient capital to meet regulatory minimums.7 Importantly, if a bank fails to maintain adequate capital then the Fed can prevent the bank from returning cash to shareholders through dividends or stock buybacks.8

Therefore, the Fed’s stress tests act as a de facto binding capital constraint on banks.**

**No ####ing ####.