All 22 U.S. Banks Pass Fed Stress Tests, Clearing Path for Dividends and Buybacks

The Federal Reserve's annual stress tests have concluded with all 22 of the largest U.S. banks passing the evaluation. This outcome indicates that these financial institutions would remain solvent and operational even under severe economic conditions, absorbing significant hypothetical losses. The stress tests, which simulate a severe economic downturn, are designed to ensure that banks have sufficient capital to continue lending and supporting the economy during times of crisis.

The results of these tests are crucial as they determine the banks' ability to distribute dividends and repurchase shares. With all banks passing, it clears the way for them to boost buybacks and dividends, which can be beneficial for shareholders. The Federal Reserve's assessment underscores the resilience of the U.S. banking system, showing that these institutions are well-prepared to withstand economic shocks.

The stress tests this year were less severe compared to previous years, which may have contributed to the better performance of the banks. The tests are part of the Federal Reserve's ongoing efforts to ensure the stability of the financial system. By passing these tests, banks demonstrate their ability to manage risks and maintain financial health, which is essential for economic stability.

The outcome of the stress tests is a positive sign for the banking sector, as it indicates that the largest banks in the U.S. are in a strong position to support economic growth. The results also reflect the effectiveness of regulatory measures implemented after the 2008 financial crisis, which aimed to strengthen the banking system and prevent future crises. With the banks passing the stress tests, they are now free to return capital to shareholders, which can further boost investor confidence and support economic activity.

In the Fed’s scenario, there would be less of a rise in unemployment, less of a severe economic contraction, less of a drop in commercial real estate prices, less of a drop in housing prices, among other metrics compared to what they tested in 2024. All of these less harmful, but simulated, drops mean there would be less damage to these banks’ balance sheets and less risk of these banks of potentially failing. Since the banks passed the 2024 tests, it was expected that the banks would pass the 2025 tests.

“Large banks remain well capitalized and resilient to a range of severe outcomes,” said Michelle Bowman, the bank’s vice chair for supervision, in a statement. An appointee of President Trump, Bowman became the Fed’s vice chair of supervision earlier this month. The Fed said it went with a less vigorous test because the global economy has weakened since last year, and therefore the test tends to weaken. Further, the bank said previous tests had shown “unintended volatility” in the results and it plans to seek public and industry comment to adjust stress tests in future years. The Fed also chose to not test the banks as heavily on their exposure to private equity assets, arguing that private equity assets are typically held for the long term and are not typically sold at times of distress.

The Fed also didn’t test for any bank exposure to private credit, a $2 trillion asset class that even Fed researchers themselves have observed to be growing alarmingly quickly. The Federal Reserve Bank of Boston recently pointed out that private credit could be a systemic risk to the financial system under a severe adverse scenario, which is exactly what the stress tests are supposed to test for. There was no wording or phrasing in the Fed’s press release, reports or methodology about testing or measuring private credit or private debt in this year’s test. The Fed did do what it calls an “exploratory analysis” of the private credit market, which concluded the major banks were “generally well-positioned” to withstand losses in the private credit market. That analysis was entirely separate and not part of this year’s test.

The Fed’s “stress tests” were created after the 2008 financial crisis as a way to gauge whether the nation’s “too big to fail” banks could withstand another financial crisis like the once that happened nearly 20 years ago. The tests are effectively an academic exercise, where the Fed simulates a scenario in the global economy and measures what that scenario would do to bank balance sheets. The 22 banks that are tested are the biggest names in the business, such as JPMorgan Chase, Citigroup, and Goldman Sachs, which hold hundreds of billions of dollars in assets and have wide-ranging businesses that touch every part of the U.S. and global economy.

Under this year’s hypothetical scenario, a major global recession would have caused a 30% decline in commercial real estate prices and a 33% decline in housing prices. The unemployment rate would rise to 10% and stock prices would fall 50%. In 2024, the hypothetical scenario was a 40% decline in commercial real estate prices, a 55% decline in stock prices and a 36% decline in housing prices. With their passing grades, the major banks will be allowed to issue dividends to shareholders and buy back shares of stock to return proceeds to investors. Those dividend plans will be announced next week.