FED UNDER STRESS

Banks mull lawsuit

Wall Street wants some stress relief.

Big banks and their trade groups are weighing a possible legal challenge against the Federal Reserve’s annual “stress tests,” which are supposed to assess how well the financial firms would weather another financial crisis, according to a report.

The Fed stress tests, which were put in place after the 2008 financial crisis, serve as a closely watched benchmark that affects the banks’ ability to deploy their capital.

The annual exams are also expensive, data-intensive and time-consuming — not to mention stressful — for firms that have to deal with the burden.

The discussions are still in the early stages and may not lead to a legal challenge or demands for changes as the banks are divided on whether the fight would be worth it, according to the Wall Street Journal, which first reported on the possible move.

While some may chafe under scrutiny, the stress tests, along with a battery of new regulations, are also the cost of doing business after the crash of Lehman Brothers nearly cratered the global financial markets eight years ago.

Whether a bank passes a test has a major effect on a company’s operations.

If the central bank doesn’t deem a firm healthy enough, it can restrict its ability to pay dividends or buy back stock.

“It’s a broader issue of how much control a bank supervisor should have over a bank as opposed to oversight,” said Ernie Patrikis, a partner at White & Case as well as a former general counsel of the Federal Reserve Bank of New York.

“This has taken the approval of dividends away from shareholders and put it in the [Fed’s] board of governors,” he said.

While a challenge to the Fed’s oversight is rare, it’s not unprecedented.

Earlier this year, life insurance giant MetLife won a court challenge to its designation as “too big to fail,” arguing that the Fed’s standards are arbitrary and the company wasn’t, in fact, systemically important. The case is being appealed.

Most banks pass the stress tests. This year, the Fed cleared 30 of the 33 banks.

The tests’ importance has given rise to a cottage industry of consultants, lawyers and data scientists who charge millions to help firms pass.