Fed stress test results: Major banks all pass, but the test was milder
The Fed said all major banks passed its annual stress test. But this year's test was clearly less severe than in prior years.
The Fed said the 22 banks tested this year would remain solvent and above the minimum threshold for operating even after absorbing roughly $550 billion in hypothetical losses.
In the Fed's scenario, compared with the 2024 test, job growth was smaller, the recession was less severe, commercial real estate prices fell by less, and home prices also declined by less, among other differences.
These "milder" simulated declines mean less damage to banks' balance sheets and a lower risk of potential failures. Because banks passed the 2024 stress test, markets expected them to pass the 2025 test as well.
Fed Vice Chair for Supervision Michelle Bowman said: "Large banks remain well capitalized and can withstand a range of severe outcomes." Bowman was appointed by President Trump and took over as Fed vice chair for supervision earlier this month.
It is unclear why the Fed chose a lighter test this year. The Fed said past tests had caused "unintended volatility" in the results, and it plans to seek public and industry input to adjust future annual stress tests.
The Fed also chose to apply a lighter test to private equity assets. Its rationale is that private equity assets are usually held for the long term and are generally not sold in stress scenarios when markets are tight.
In addition, the Fed did not test any bank's exposure to "private credit" this year. The asset class is worth about $2 trillion, and Fed researchers have also observed its growth rate with concern. The Boston Fed recently noted that in a severely adverse scenario, private credit could pose systemic risk to the financial system, and stress tests are designed to measure such risks.
In this year's Fed press releases, reports, or test methodology, there was no mention of testing or measuring private credit or private debt.
The Fed's "stress tests" were created after the 2008 financial crisis to assess whether banks deemed "too big to fail" could withstand shocks similar to those of the crisis nearly 20 years ago. The stress test can be viewed as an academic exercise: the Fed simulates global economic scenarios and measures the impact on banks' balance sheets.
The 22 banks tested this year include major institutions such as JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs. Together they hold hundreds of billions of dollars in assets and operate across many parts of the U.S. and global economy.
In this year's hypothetical scenario, if there were a major global recession, commercial real estate prices would fall 30%, home prices 33%, unemployment would rise to 10%, and stock prices would fall 50%. In the 2024 scenario, commercial real estate prices fell 40%, stock prices 55%, and home prices 36%.
With the test passed, major banks will be allowed to pay dividends to shareholders and buy back stock to return cash to investors. Their dividend plans will be announced next week.
