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Bank Groups Weigh Legal Challenge to Fed Stress Tests

Bank trade groups and industry advisers are debating the possibility of legally challenging the Federal Reserve in an attempt to force changes to annual “stress tests” of the biggest U.S. lenders, people familiar with the talks said.

Even if banks ultimately decide against action, serious contemplation of such a challenge is somewhat extraordinary. It shows growing frustration among big financial firms with the tests, which have become even more of a burden with superlow interest rates weighing on profits.

The discussions are at an early stage and big banks are divided over whether the talks should continue, the people familiar with the matter said. Over the past several months, industry advisers and representatives from some big U.S. banks have been involved in several calls discussing the possibilities, with the latest occurring a few weeks ago, the people said. That said, there hasn’t been a formal presentation or meeting yet involving top bank executives.

The discussions have centered on legal strategies that would allow a challenge to the stress tests, with much of the focus on their opacity and how the Fed changes certain aspects of the exams each year.

Additionally, participants in the talks have weighed how the Fed and tests could be influenced by the outcome of the presidential election and whether that would argue for a more cautious course of action.

A Fed spokesman declined to comment on the potential suit.

The Fed-administered stress tests are the centerpiece of the post-financial-crisis regulatory overhaul and affect firms with more than $50 billion in assets. Last year, 33 firms took them.

The exams arguably have made banks safer by forcing them to better measure risks they face. They also dictate the amount of capital banks can return to shareholders, in turn influencing returns on equity and share-price valuations. Given that, the tests in some ways have become a deciding factor in how banks run their businesses.

A big point of contention among banks is the opacity of the tests, as...