This week, the market observed what seems to be two major shifts in the Federal Reserve's regulatory policy for the banking industry. Firstly, there is a relaxation of the parameters for the 2025 annual bank stress tests, and secondly, informed sources revealed that the Federal Reserve will cancel the climate stress test requirements for six major banks in the USA.

Analysts believe this indicates that the regulatory environment is developing towards being more relaxed and transparent. The market reacted positively to the policy adjustments, with bank stocks seeing broad gains on Thursday. Among them, larger banks performed even better, with the KBW Nasdaq Bank Index increasing by 1.2%, surpassing the 0.9% rise in the S&P regional bank ETF. In terms of individual stocks, Citigroup rose over 3.5%, while Goldman Sachs, Morgan Stanley, and Bank of America each saw increases of more than 1.5% at one point.

Bank stress tests: Economic shock assumptions have been eased, and test conditions have become more manageable.

The Federal Reserve released the new parameters for the 2025 annual bank stress tests after the market closed on Wednesday.

Barclays Analyst Jason Goldberg pointed out in a report on Thursday that although the tests remain challenging, the economic shock assumptions for the 2025 tests have been eased compared to the more stringent conditions of the past two years. The new test assumptions include an unemployment rate that may peak at 10%, a 33% drop in housing prices, and a reduced decline in stock and real estate market value compared to before. These adjustments have lowered the difficulty of the tests.

It is worth noting that the Federal Reserve has committed to improving the transparency and stability of the tests. The Federal Reserve stated in its announcement that it will 'reduce outcome volatility and improve model transparency' in the new tests. This action addresses the long-standing complaints from the banking industry regarding opaque management. Last December, banking trade organizations even sued the Federal Reserve over stress test issues.

The changes in stress tests support the views of Wall Street analysts that under the leadership of the Trump administration, large banks in the USA will face a more favorable regulatory framework. Since the 2008 financial crisis, the largest banks in the USA have been required to undergo annual tests to assess their ability to continue providing loans to consumers and businesses during severe recessions.

Bank of America Analyst Ebrahim Poonawala pointed out on Thursday:

"The stress test scenarios for 2025 are generally better than last year, which boosts our confidence that Banks should begin to receive relief in regulatory capital requirements, as we expect the regulatory framework to shift towards being balanced, transparent, and more predictable."

Cancellation of climate stress tests: The Federal Reserve's stance is turning conservative.

On the same day, Bloomberg cited sources saying that the Federal Reserve has decided to terminate the climate stress testing requirements for the six largest Banks in the USA, including JPMorgan, Citigroup, and Goldman Sachs.

The Federal Reserve launched the pilot climate stress tests in 2023 and first published the test results last year, aiming to help the largest Banks in the USA identify and manage financial risks related to climate change. These tests do not directly affect the Banks' capital requirements or other regulatory Indicators.

The six Banks that participated in the pilot in 2023 spent months assessing the impact of climate change on portfolio value, but the test results revealed data gaps and issues with information reliability.

The Federal Reserve stated in May last year that these issues led to significant uncertainty in the test results. On Thursday, it was reported that the Federal Reserve ultimately decided to terminate this plan.

Analysts pointed out that this policy adjustment is seen as another significant setback for USA's climate financial policy. In recent years, the Federal Reserve has gradually withdrawn from international cooperation related to climate issues.

In addition to terminating the Banks' climate stress tests, the Federal Reserve also withdrew from the "Network for Greening the Financial System" (NGFS), a decision announced just days before Trump's inauguration. Moreover, all six major banks in the USA withdrew from the key climate finance organization in the Industry: the "Net-Zero Banking Alliance."

Even before Trump's return to the White House, Federal Reserve Chairman Powell had publicly stated that climate change should not be a core policy issue for the Federal Reserve. This stance was also reflected when the Federal Reserve opposed the Basel Committee on Banking Supervision's proposal for global climate risk disclosure.

In stark contrast to the Federal Reserve's withdrawal, the European Central Bank and the Bank of England are leading in climate finance risk management.

Since 2022, the European Central Bank has begun conducting climate stress tests on Banks. The results of these tests indicate that banks unprepared for the consequences of climate change could face potential losses of billions of euros. The European Central Bank subsequently stated that it would impose financial penalties on banks that do not adequately address such risks.

The Bank of England initiated the first large-scale climate risk assessment for the financial sector as early as 2021. This work was originally planned to start in 2020 but was postponed due to the impact of the pandemic.

Editor/lambor