Financial Services Association, December 25 (Editor Shi Zhengcheng) A complaint was received from Wall Street just as the Federal Reserve publicly “confessed” and announced that it would carry out major policy revisions to stress tests in the banking industry.

On Tuesday local time, the Bank of America Policy Institute (BPI) officially sued the Federal Reserve in court, accusing the Federal Reserve of using an opaque process to test banks' resilience in annual stress tests.

The lawsuit stated: “The banking industry faces significant and unpredictable fluctuations in capital requirements due to the lack of transparency in the Federal Reserve Board of Governors.”

The Bank of America Policy Institute is an industry organization. Its members include large banks such as J.P. Morgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, Citibank, Wells Fargo, and the Bank of America Group. The Chairman of the Board of Directors of the Bank of America Policy Institute is Jamie Dimon, the “Big Brother of Wall Street” and CEO of J.P. Morgan Chase.

(Bank of America Policy Institute's Board of Governors gathers famous Wall Street figures, source: official website)

The latest chapter in Wall Street's fierce battle with the Federal Reserve

This lawsuit also marks a substantial escalation of Wall Street's fight against the Federal Reserve's banking regulations. As Trump is about to come to power, I'm afraid the timing was not a coincidence.

As early as 2023, in the face of the Federal Reserve's proposal to implement new capital rules (that is, the final version of the Basel III Agreement), Wall Street quickly organized a fierce protest against the Federal Reserve and threatened to file a lawsuit. Faced with the fierce attack on Wall Street, the Federal Reserve admitted hesitation this fall and announced that it was preparing to drastically reduce the proposed capital increase requirements.

But it's clear that this fight isn't over. Now Wall Street is targeting the Federal Reserve's annual stress test onslaught.

The purpose of the stress test is to measure the performance of the banking industry in the face of adverse conditions. If the test results are poor, the Federal Reserve will require banks to increase capital and restrict dividend payments and repurchases. In a recent annual test, the conditions examined were how banks responded to a 40% drop in commercial real estate prices and a 36% drop in residential prices.

In the lawsuit, the banks said they did not want to cancel the stress tests, but asked the Federal Reserve to increase the transparency of the stress tests. “Stress tests may cause unexpected capital burdens of billions of dollars to be placed on individual banks for no apparent reason, and this situation may adversely affect the economy as a whole,” the lawsuit reads.

Goldman Sachs CEO David Solomon criticized earlier this year that the process was very opaque and that the volatility of the results “made prudent capital management difficult for us and all of our peers.”

I'm afraid the US Federal Reserve, which is already aware of the lawsuit preparations, issued an announcement after closing on Monday, stating that it is preparing to seek public opinion on major changes to the stress test, with the aim of increasing transparency and reducing the volatility of the results.

(Source: Federal Reserve)

Greg Bell, CEO of the Bank of America Policy Institute, said, “We appreciate the Federal Reserve's announcement. This is a first step towards transparency and accountability, but it is still necessary to file this lawsuit to protect our legal rights.”

Of course, the US banking industry is also worried. The Federal Reserve's announcement did not mention changes that substantially changed capital requirements and could not meet their demands to reduce heavy banking regulations.

According to previous reports, Trump's transition team is exploring ways to reduce, merge, or even remove Wall Street banking regulators. Similar to Powell, the term of Michael Barr, the Federal Reserve's vice chairman in charge of regulatory affairs, will also end in 2026, and Trump will be responsible for nominating a successor.

While the two sides are struggling with each other, there are also US groups that believe that once the Federal Reserve discloses the stress test model, it will make stress testing an easy process to operate.

Dennis Kelleher, chairman of the American economic think tank Better Markets, believes that the Federal Reserve has almost made it clear that it intends to hand over the “key” to the stress test to Wall Street Bank. This will make the tests largely predictable, easy to manipulate, and more beneficial to banks.