The Federal Reserve is facing legal action from a coalition of banks and business groups, including the Bank Policy Institute (BPI) and the American Bankers Association. The suit centers around the annual bank stress tests, with the institutions accusing the Fed of legal violations. Major banks such as JPMorgan, Citigroup, and Goldman Sachs are among those represented by the BPI.

The coalition argues that the current stress test process is lacking and results in fluctuating and unclear restrictions and requirements on bank capital. They made it clear that their aim isn’t to oppose stress testing but to ensure the process is subject to public input, as demanded by federal law.

The Federal Reserve’s stress test is an annual exercise that requires banks to keep sufficient buffers for bad loans and determines the proportion of share repurchases and dividends. The test has been criticized for its opacity and its potential effects on bank lending and economic growth.

On Monday, the Federal Reserve announced plans to revise the bank stress tests and is inviting public comment on significant changes. The decision to modify the tests has been attributed to changes in administrative laws in recent years. However, the specifics of these modifications have not been disclosed.

BPI CEO, Greg Baer, welcomed the Fed’s announcement as a step towards transparency and accountability and hinted at further action to ensure timely reforms.

Despite the Fed’s proposed changes, the banking groups believe that the modifications may not be sufficient to address their concerns about burdensome capital requirements. They have previously accused the Fed of violating the Administrative Procedure Act for not soliciting public comment on its stress scenarios and keeping supervisory models confidential.

The Federal Reserve has stated that the proposed changes are not intended to materially affect overall capital requirements. Whether these proposed changes will satisfy the banking groups remains to be seen.