Fed stress test: Major U.S. banks can absorb $708 billion in losses and keep lending

The Fed's annual stress test shows that the biggest U.S. banks can absorb more than $708 billion in losses under a "severe global recession" scenario while continuing to lend to households and businesses.

In the Fed's hypothetical scenario, all 32 tested banks remain above the regulatory minimum capital requirements. The scenario includes unemployment rising to 10%, commercial real estate prices falling 39%, and home prices falling 30%.

The key capital metric that reflects a bank's ability to absorb losses in a downturn — the industry's common equity tier 1 (CET1) ratio — fell 1.6 percentage points during the test, but still stayed well above the required minimum.

By loss estimates, the banking groups are expected to absorb about $200 billion in total losses, including roughly $200 billion from credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.

Fed Vice Chair for Supervision Michelle Bowman said: "Today's results show the resilience of the banking system."

The timing of this year's stress test release is important. Unlike in previous years, the results will not affect the amount of capital large banks must hold. In February 2025, the Fed said it would keep the stress-test buffers unchanged through 2027 so regulators could hear industry feedback while overhauling the methodology.

KBW analysts described this year's test as "a formality" in a June 21 research note, and said banks are more likely to focus on the Basel III Endgame proposal expected later this year than on the stress test results themselves.

KBW estimates that if this year's results were counted toward capital requirements, Morgan Stanley, Citigroup, Citizens Financial and KeyCorp could see sizable reductions in capital buffers.