Fed stress test finds big banks could absorb $708 billion in losses
The Federal Reserve said 32 large banks stayed above capital minimums in a recession scenario, even as capital rules are being reworked.
By Hana Yoshida · Markets Reporter
3 min read
The largest U.S. banks cleared the Federal Reserve’s annual stress test, with the central bank saying they could take more than $708 billion in losses under a severe downturn and still keep lending. The results matter less for near-term capital requirements than usual because the Fed has paused changes to stress test buffers while it revises the process.
The Fed said Wednesday that all 32 banks in the test stayed above their required capital minimums in its hypothetical recession scenario. The exercise tested how banks would hold up if unemployment rose to 10%, commercial real estate prices fell 39% and home prices dropped 30%.
The central bank said the industry’s common equity tier 1 ratio, a closely watched measure of loss-absorbing capital, declined by 1.6 percentage points during the scenario. The Fed said the group still remained above required levels after that decline.
Projected losses included about $200 billion from credit cards, $160 billion from commercial and industrial loans and $75 billion from commercial real estate, according to the Fed. Those figures were part of the regulator’s broader estimate of more than $708 billion in losses across the tested banks.
“Today’s results underscore the strength of the banking system,” Federal Reserve Vice Chair for Supervision Michelle Bowman said in the Fed’s release.
The annual test arrived while bank regulators are reconsidering how capital rules should be applied to large lenders. The Fed said in February that it would keep stress test buffers unchanged until 2027 while it works on the test’s methodology.
That decision means this year’s results will not determine how much capital large banks must hold through the stress capital buffer, according to the Fed. In past years, the stress test outcome fed directly into those requirements for individual firms.
Banking industry groups have criticized elements of the stress test process, and the Fed’s February decision responded to those complaints by leaving buffers in place during the review. The central bank has not yet completed the methodology overhaul.
KBW analysts led by Christopher McGratty wrote in a June 21 research note that this year’s exercise amounted to “going through the motions,” according to CNBC. The analysts said banks were likely to pay more attention to the pending Basel III Endgame proposal expected later this year than to the stress test results.
KBW also estimated that Morgan Stanley, Citigroup, Citizens Financial and KeyCorp would have had some of the largest cuts to their capital buffers if the 2026 results had been applied to requirements, CNBC reported. Because the Fed is holding buffers steady until 2027, those estimated reductions will not take effect from this year’s test.
The Fed’s stress tests are designed to show whether major banks could keep operating through a sharp economic contraction. This year’s findings give regulators a snapshot of bank resilience while leaving the larger debate over future capital rules unresolved.
This story draws on original reporting from CNBC.