In a recent announcement, the Federal Reserve revealed that all major banking institutions successfully navigated this year’s stress testing, though the scrutiny applied was notably less rigorous compared to previous assessments. According to the Federal Reserve, all 22 banks examined would have maintained solvency and exceeded the necessary thresholds for continued operation despite encountering hypothetical losses amounting to $550 billion. This year’s scenario depicted milder challenges compared to what banks endured in 2024, showcasing more moderate declines in unemployment, economic contraction, commercial real estate prices, and housing prices.
This year’s less severe scenarios translated into reduced strain on the banks’ financial standings, minimizing potential risks of bank failures. With the previous year’s tests already successfully passed, there was an anticipation that the banks would clear the 2025 evaluations as well. Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, highlighted that “Large banks remain well capitalized and resilient to a range of severe outcomes.” Bowman, appointed by President Trump, recently ascended to her supervisory role earlier this month.
The choice for a less demanding examination stemmed from the weakening of the global economy in the past year, which influenced the decrease in testing intensity. Furthermore, previous evaluations have yielded “unintended volatility” in the outcomes, prompting the Fed to seek public and industry feedback for refining future stress tests. The Fed also opted not to challenge banks extensively on their investments in private equity assets, citing their typical long-term holding pattern and disposition against sale during periods of financial distress.
Additionally, the tests did not cover bank exposure to private credit, a rapidly expanding $2 trillion asset class. Concerns have arisen from Federal Reserve Bank of Boston researchers about the potential systemic risk private credit poses under adverse conditions, a scenario the stress tests aim to assess. Nevertheless, there was no mention of private credit in this year’s assessments, although the Fed conducted an “exploratory analysis” indicating that major banks were “generally well-positioned” against potential private credit market losses. However, this analysis remained separate from this year’s main stress tests.
These stress tests have been a staple in the aftermath of the 2008 financial crisis, created to evaluate whether the nation’s largest banks, often deemed “too big to fail,” can withstand crises similar to those experienced nearly two decades ago. The tests involve the Federal Reserve simulating various global economic scenarios to assess their impact on bank balance sheets.
The cohort of 22 banks undergoing this examination includes prominent entities such as JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs. These banks are cornerstones of the financial industry, wielding significant assets and engaging in diverse operations impacting both the U.S. and global economies. The scenario for this year envisaged a substantial global recession marked by a 30% decrease in commercial real estate values, a 33% drop in housing prices, a sharp increase in unemployment rates to 10%, and a 50% decline in stock prices. This contrasts with the 2024 scenario consisting of steeper downturns across various metrics.
Having successfully passed this year’s stress tests, banks can proceed with issuing dividends and repurchasing shares, thus distributing proceeds back to investors. The plans for dividend issuance are set for announcement in the coming week.