Recently, the game between the US banking industry and regulators has once again escalated. A number of industry giants have jointly filed lawsuits against the Federal Reserve, questioning the legality of its annual bank stress tests.

According to CNBC reports, the prosecution includes the Bank Policy Institute (Bank Policy Institute) representing large banks such as J.P. Morgan Chase, Citigroup, and Goldman Sachs, as well as the American Bankers Association, the Ohio Bankers Union, the Ohio Chamber of Commerce, and the American Chamber of Commerce.

The groups said they are not opposed to the stress test itself, but believe that the current process is inadequate and “imposes fluctuating and unexplained requirements and restrictions on bank capital.” Their lawsuit is aimed at “addressing long-standing legal violations by requiring a stress testing process to accept public comment by law”.

This lawsuit is not an accident; it is a concentrated outbreak of long-standing dissatisfaction with the existing regulatory framework in the US banking industry. Since the financial crisis, US financial regulations have become stricter. Although systemic risks have been reduced to a certain extent, they have also brought huge compliance costs and operating pressure on the banking industry.

Litigation Focus: Transparency and Public Engagement

After the 2008 financial crisis, US regulators introduced annual stress tests to prevent systemic risks. By simulating extreme scenarios such as a severe economic recession, the bank's balance and liability situation is tested, and the bank's capital requirements are adjusted based on this to ensure that it can maintain normal operations during the crisis period and avoid repeating the same mistakes.

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

The core of this lawsuit is that the banking industry believes that the Federal Reserve did not fully solicit opinions from the public and industry when formulating models and scenarios for stress tests, and lacked sufficient transparency.

Furthermore, due to the opacity of test models and scenarios, test results fluctuate greatly, and banks' capital requirements are adjusted frequently. The banking industry believes this has seriously affected their operational efficiency and long-term planning, and increased their operating costs and uncertainty.

Faced with questions from the banking industry, the Federal Reserve issued a statement on Tuesday Beijing time, stating that it will revise the bank stress tests and seek public comments on this. The Federal Reserve said these “major changes” are aimed at “improving the transparency of bank stress tests and reducing the volatility of capital buffer requirements resulting from this.”

Greg Baer, CEO of the Banking Policy Research Institute, welcomed the Federal Reserve's statement, calling it “the first step towards transparency and accountability.” But at the same time, he hinted that further action might be taken:

“We are carefully reviewing and considering other options to ensure timely implementation of reforms that are both legitimate and reasonable”.