All 32 of the largest US banks passed the Federal Reserve's annual stress test, the regulator said, demonstrating that the financial system could absorb hundreds of billions of dollars in hypothetical losses during a severe recession while continuing to lend. The clean sweep clears the way for banks to return more capital to shareholders through dividends and buybacks.
The exam, released on Wednesday, applied to banks with more than $100 billion in assets, a group that includes JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. Every institution remained above its minimum common equity tier 1 capital requirement under a hypothetical scenario designed to simulate a severe global downturn, the Fed said.
That scenario was punishing on paper. It assumed a 39% plunge in commercial real estate prices, a 30% drop in house prices, and unemployment climbing to a peak of 10%, alongside a broad decline in economic output triggered by an abrupt collapse in risk appetite. Under those conditions, the banks were projected to absorb more than $708 billion in total loan losses, including roughly $200 billion tied to credit cards, about $160 billion from commercial and industrial loans and around $75 billion from commercial real estate.
Despite that, the industry's aggregate common equity tier 1 ratio, the key measure of high-quality capital that absorbs losses, fell by just 1.6 percentage points during the exercise, dropping to a low point of 11.2% before recovering, and remained comfortably above the 4.5% minimum. Vice Chair for Supervision Michelle Bowman said the results underscored the strength of the banking system, adding that the central bank was working to make the test more transparent and accountable.
This year's exercise carried an unusual wrinkle: the results will not affect how much capital the large banks are required to hold. The Fed announced in February that it would leave the stress-capital-buffer requirements unchanged until 2027 while it reworks the methodology behind the test, a response to long-standing industry complaints and part of a broader effort to make the process more predictable. As a result, some analysts described this year's run as going through the motions, with banks more focused on a separate set of pending capital rules expected later in the year.
The mechanics of the test produced offsetting effects. The Fed said capital was pressured by higher projected loan losses, owing to larger loan balances and the severity of certain scenario variables, and by smaller hypothetical declines in interest rates, which reduced gains on bank securities holdings. Those drags were more than offset by higher projected interest income, reflecting recent bank performance and the same milder path for rates.
With the results in hand and capital requirements left untouched, banks moved quickly to signal their plans for returning cash. JPMorgan Chase said it would raise its quarterly dividend to $1.65 a share from $1.50 and intends to repurchase an additional $50 billion of stock, and other lenders are expected to announce their own payout plans in the days ahead. The stress test, mandated annually under the law passed after the 2008 financial crisis, has become a key gate that banks must clear before stepping up distributions, and this year's broadly strong showing removes that constraint heading into the second half of the year.