Fed stress test results: all big banks pass, but with milder strain
The Federal Reserve said all major banks passed its annual stress test of the financial system. But the stress scenario used this year was clearly less severe than in prior years.
The Fed said the 22 banks tested this year would remain solvent even after absorbing about $550 billion in hypothetical losses, and would still stay above the minimum level needed to keep operating.
Compared with 2024, several indicators in this year's scenario fell in a more moderate way, including a smaller rise in unemployment, a less severe economic contraction, a smaller drop in commercial real estate prices, and a smaller decline in home prices. As a result, these simulated but smaller declines imply less damage to banks' balance sheets and a lower risk of failure.
Since banks had already passed the 2024 stress test, the market widely expected them to pass the 2025 test as well.
Michelle Bowman, the Fed's vice chair for supervision and vice chair of the board, said in a statement: "Large banks remain well capitalized and can withstand a range of severe scenarios." Bowman, a Trump appointee, began serving as vice chair for supervision earlier this month.
It is not yet clear why the Fed chose a less stringent test this year. In its explanation, the Fed said prior tests had shown "unexpected volatility" in the results and that it plans to seek public and industry input to refine the stress test in future years.
In addition, the Fed gave lower weight this year to banks' private equity holdings in its tests. Its reasoning was that private equity assets are usually held for longer periods and are less likely to be forced into sale during market stress.
The Fed also did not test banks' exposure to "private credit." This asset class is worth about $2 trillion and, according to Fed researchers, has been growing at a troubling pace. The Boston Fed recently said that in a severely adverse scenario, private credit could pose a systemic risk to financial stability, and stress tests are meant to assess the impact of such worst-case scenarios.
In its press release, report, and methodology, the Fed did not use any wording this year indicating that private credit or private debt would be tested or measured.
The Fed's stress tests were created after the 2008 financial crisis to assess whether so-called too-big-to-fail banks could withstand a crisis-like shock. At their core, the tests are academic simulations: the Fed assumes a global economic scenario and measures its effect on banks' balance sheets.
The 22 banks tested this year include the industry's largest institutions, such as JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs. These firms hold hundreds of billions of dollars in assets and operate across many sectors of the U.S. and global economy.
In this year's hypothetical scenario, a severe global recession would push commercial real estate prices down 30%, home prices down 33%, unemployment up to 10%, and stock prices down 50%. In the 2024 hypothetical scenario, commercial real estate prices fell 40%, stock prices 55%, and home prices 36%.
After passing the stress test, these large banks will be allowed to pay dividends to shareholders and buy back shares to reward investors. Their dividend plans will be announced next week.
