Federal Reserve stress test may be illegal: banking group

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013. REUTERS/Jonathan Ernst

(Reuters) - The Federal Reserve may have violated the law in adopting key parts of the bank stress tests, according to a study released on Thursday from a group whose members include large Wall Street banks.

The paper from the Committee on Capital Markets Regulation, a not-for-profit organization whose members include executives from banks including Goldman Sachs Group Inc GS.N, JPMorgan Chase & Co JPM.N, Wells Fargo & Co WFC.N and UBS Group AG UBSG.S details the latest argument that banks could make if they sued the Federal Reserve over the tests.

It is rare for banks to sue their regulators but sources familiar with the matter have said that a potential lawsuit is being considered.

The report says that the Fed has likely not complied with the so-called Administrative Procedure Act which states that federal agencies must provide the public notice of proposed rules and an opportunity to comment on them.

The Fed’s annual stress tests, known as CCAR, evaluate if the largest U.S. bank holding companies have enough capital to withstand an unforeseen crisis, with stock markets dropping precipitously.

Since the financial crisis, regulators have been increasing capital requirements for banks with the intention of making the financial system safer.

This year, 31 out of 33 U.S. banks passed the stress tests.

Reporting by Olivia Oran in New York; Editing by Chris Reese