Better Markets sued the Federal Reserve and Vice Chair for Supervision Michelle Bowman on Sept. 10, alleging private talks with Wall Street banks during a live capital-rulemaking consultation violated the Administrative Procedure Act. The suit targets a rewrite that cuts the largest banks' aggregate capital increase to about 9 percent from 16 percent proposed in 2023, and could delay finalization past 2027.
A Washington advocacy group opened a rare legal front against the Federal Reserve on Thursday, filing suit in D.C. federal court over how the central bank has run the public consultation on its bank capital rewrite. Better Markets named the Fed and Vice Chair for Supervision Michelle Bowman as defendants, arguing that her private conversations with Wall Street banks about a live rulemaking breached the Administrative Procedure Act. The complaint asks the court to enjoin what it calls a "bad faith and corrupted rulemaking" — an unusual direct attack on the Fed's rulemaking process, filed while the substance of the capital overhaul is still unwritten.
"The APA's ex parte contact rules exist precisely to prevent an agency from negotiating a rule with the parties it is supposed to regulate," said Dennis Kelleher, president and chief executive of Better Markets, said. The complaint cites April reporting by Reuters that Bowman told the industry she did not expect another major pushback after banks fought aggressively to force the Fed to overhaul its original 2023 capital plan, and a Bloomberg report that she privately told Wall Street leaders to support capital plans "widely seen as a win for industry" and to stop asking for carve-outs.
The procedural fight sits on top of a substantive one that has already reshaped the numbers. The Fed's July 2023 proposal would have raised aggregate common equity tier 1 requirements for the largest U.S. banks by roughly 16 percent, with the eight global systemically important banks absorbing most of the increase. The revised approach the Fed has been developing since 2025 cuts that aggregate increase to about 9 percent, with the largest banks seeing an increase closer to 5 percent and the mid-sized category seeing a modest reduction. The 2023 plan drew more than 97,000 comment letters, a record for a Fed banking rulemaking, and the rewrite has been open for public consultation through 2026.
That gap is the money at stake. A 16 percent CET1 increase would have required the largest banks to retain or raise tens of billions of dollars in additional capital; the roughly 9 percent version frees a substantial share of that for lending, trading, and shareholder distributions. Morgan Stanley and JPMorgan Chase have both flagged the capital trajectory as a swing factor for buyback capacity, and Goldman Sachs has tied its return-on-equity guidance to the final calibration. If a court vacates the rule on procedural grounds, the Fed would have to restart notice-and-comment, pushing finalization past 2027 and leaving banks to plan against the 2023 baseline in the interim.
The precedent matters beyond this rule. Wall Street groups have sued federal regulators routinely, but litigation against the Fed over a rulemaking is rare — big banks sued the central bank in 2024 over its annual stress tests and over updated fair lending rules, the first such suits in recent memory, according to a Reuters analysis and academic Fed-watchers at the time. A ruling that private ex parte contacts can void a capital rule would give every future challenger a procedural lever that does not require winning on the economics of the rule itself.
The last time a federal court seriously tested a financial regulator's rulemaking process on APA grounds, in the 2024 stress-test litigation, the case settled into a Fed commitment to publish its models and seek public comment on them — a procedural concession rather than a vacatur. That outcome is the template banks and their lawyers are likely working from here: not a court-ordered rewrite, but a Fed that has to document its process more heavily and move more slowly.
Bowman, who has led the rewrite, has said her goal is to streamline regulation and oversight so it is more sensitive to real risks. A Fed spokesperson did not immediately respond to a request for comment. The central bank has not yet published a final rule or a firm date for one, and the litigation gives it a reason to extend that timeline rather than compress it. For the largest banks, the practical effect is a longer window of capital ambiguity: the difference between a 5 percent and a 16 percent CET1 increase is worth tens of billions of dollars of deployable capital, and that number now depends on a judge as much as on the Board.
This article is for informational purposes only and does not constitute investment advice.
