Wall Street Bank Group sues the Federal Reserve over annual stress tests, seeking transparency

Recently, the game between the U.S. banking industry and regulators has escalated again. Several industry giants have jointly filed a lawsuit against the Federal Reserve, questioning the legality of its annual bank stress tests.

According to CNBC, the plaintiffs include the Bank Policy Institute, which represents large banks such as JPMorgan Chase, Citigroup, and Goldman Sachs, as well as the American Bankers Association, the Ohio Bankers League, the Ohio Chamber of Commerce, and the U.S. Chamber of Commerce.

These groups state that they do not oppose the stress tests themselves but believe that the current process has shortcomings, "creating inconsistent and unexplained requirements and restrictions on bank capital." Their lawsuit aims to "address long-standing legal violations by legally requiring the stress testing process to accept public input."

This lawsuit is not an isolated incident but rather a concentrated outbreak of the U.S. banking industry's long-standing dissatisfaction with the existing regulatory framework. Since the financial crisis, U.S. financial regulation has become increasingly stringent, which, while reducing systemic risk to some extent, has also imposed significant compliance costs and operational pressures on the banking industry.

Focus of the Lawsuit: Transparency and Public Participation

After the 2008 financial crisis, to prevent systemic risk, U.S. regulators introduced annual stress tests. By simulating extreme scenarios such as severe economic recessions, these tests assess the asset-liability conditions of banks and adjust their capital requirements accordingly to ensure they can maintain normal operations during crises and avoid repeating past mistakes.

However, this important tool aimed at maintaining financial stability has now become the target of a collective backlash from the banking industry.

The crux of the lawsuit is that the banking industry believes the Federal Reserve did not adequately solicit public and industry input when developing the models and scenarios for the stress tests, lacking sufficient transparency.

Moreover, due to the opacity of the testing models and scenarios, the results fluctuate significantly, leading to frequent adjustments in banks' capital requirements. The banking industry argues that this severely impacts their operational efficiency and long-term planning, increasing their operational costs and uncertainty.

In response to the banking industry's concerns, the Federal Reserve issued a statement on Tuesday Beijing time, stating that it will modify the bank stress tests and seek public input on this matter. The Federal Reserve indicated that these "significant changes" aim to "increase the transparency of bank stress tests and reduce the volatility of the resulting capital buffer requirements."

Greg Baer, CEO of the Bank Policy Institute, welcomed the Federal Reserve's statement, calling it "a first step toward transparency and accountability." However, he also hinted at the possibility of further action:

"We are carefully reviewing and considering other options to ensure timely implementation of reforms that are both legal and reasonable."