The U.S. financial regulatory environment is becoming more relaxed: The Federal Reserve eases bank stress tests, cancels climate tests, and bank stocks rise broadly

This week, the market discovered that the Federal Reserve seems to have two major attitude shifts regarding banking regulatory policies. One is the relaxation of parameters for the 2025 annual bank stress tests, and the other is that informed sources revealed the Federal Reserve will cancel the climate stress test requirements for the six major banks in the United States.

Analysts believe this indicates that the regulatory environment is moving towards a more relaxed and transparent direction. The market reacted positively to the policy adjustments, with bank stocks rising broadly on Thursday. Among them, large banks performed even better, with the KBW Bank Index rising 1.2% at one point, surpassing the 0.9% increase of the S&P Regional Bank ETF. In terms of individual stocks, Citigroup rose more than 3.5% at one point, while Goldman Sachs, Morgan Stanley, and Bank of America all rose more than 1.5% at one point.

Bank Stress Tests: Economic Shock Assumptions Eased, Testing Conditions More Manageable

The Federal Reserve announced 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 in the 2025 tests have been eased compared to the more stringent conditions of the past two years. The new testing assumptions include an unemployment rate rising to a maximum of 10%, a 33% decline in housing prices, and a reduction in the decline of stock and real estate market values compared to before. These adjustments have made the tests somewhat easier.

It is noteworthy that the Federal Reserve has committed to increasing the transparency and stability of the tests. The Federal Reserve stated in its announcement that it will "reduce the volatility of results and improve model transparency" in the new tests. This move responds to the long-standing complaints from the banking industry about opaque management. In December of last year, the banking trade organization even sued the Federal Reserve over issues related to stress testing.

The changes in stress tests support Wall Street analysts' views that under the leadership of the Trump administration, large banks in the United States will face a more favorable regulatory regime. Since the 2008 financial crisis, the largest banks in the U.S. have been required to undergo tests annually to assess their ability to continue lending to consumers and businesses during severe recessions.

Bank of America analyst Ebrahim Poonawala noted on Thursday:

"The 2025 stress test scenarios are overall better than last year, which enhances our confidence that banks should begin to see relief in regulatory capital requirements, as we expect the regulatory regime to shift towards being balanced, transparent, and more predictable."

Cancellation of Climate Stress Tests: Federal Reserve's Attitude Becomes More Conservative

On the same day, Bloomberg cited informed sources stating that the Federal Reserve has decided to terminate the climate stress test requirements for the six major banks in the United States, including JP Morgan, Citigroup, and Goldman Sachs.

The Federal Reserve launched its climate stress test pilot in 2023 and published the test results for the first time last year, aiming to help the largest banks in the U.S. identify and manage financial risks related to climate change. These tests do not directly affect the banks' capital requirements or other regulatory metrics The six major banks participating in the pilot program 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 last May that these issues led to significant uncertainty in the test results. On Thursday, it was reported that the Federal Reserve ultimately decided to terminate the program.

Analysts pointed out that this policy adjustment is seen as another major setback for U.S. climate finance policy. In recent years, the Federal Reserve has gradually withdrawn from climate-related international cooperation.

In addition to terminating the climate stress tests for banks, the Federal Reserve had previously withdrawn from the "Network for Greening the Financial System" (NGFS), a decision announced just days before Trump's inauguration. Furthermore, all six major U.S. banks have exited the industry's main climate finance organization: the "Net-Zero Banking Alliance."

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

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 back in 2021. This work was originally scheduled to begin in 2020 but was delayed due to the pandemic