The Federal Reserve announced that the nation’s 32 biggest banks successfully passed its latest annual stress test, showing resilience in a hypothetical severe economic downturn. The exercise projected a sharp recession with unemployment doubling to 10 percent, a 30 percent drop in housing prices, a 39 percent plunge in commercial real estate values, and a 58 percent stock market decline. Despite anticipated losses exceeding $700 billion, the banks would remain above minimum capital standards.
The scenario included substantial credit losses, with $200 billion expected from credit cards, $160 billion from commercial and industrial loans, and $75 billion in commercial real estate loans. Even after these losses, the sector’s common equity tier 1 capital ratio only declined from 12.8 percent to 11.2 percent, reflecting the banks’ capacity to absorb significant financial shocks.
Following the stress test results, several major banks announced dividends increases and new or expanded stock buyback programs. JPMorgan Chase raised its quarterly dividend by 10 percent and approved a $50 billion buyback, while Goldman Sachs, Morgan Stanley, Wells Fargo, and State Street also boosted dividend payouts, signaling confidence in their capital positions.
The Federal Reserve stated that these results will not lead to changes in the current capital requirements for large banks, which are set to remain through 2027. The upcoming stress tests will incorporate new stress capital buffer frameworks designed with public feedback in mind. Notably, while projected losses increased from $550 billion the previous year to over $708 billion, the aggregate capital ratio decline was smaller, helped by improved loan income and more favorable assumptions on interest rate changes.