Federal Reserve stress test: 22 big banks pass, but the test was less rigorous

The Federal Reserve said all major banks passed this year’s annual stress tests, but the scenarios were noticeably less severe than in past years.

The Fed said the 22 banks tested this year would remain solvent under the scenario and stay above the minimum thresholds needed to keep operating, even after absorbing roughly $550 billion in hypothetical losses.

In the assumed scenario, several macroeconomic indicators fell less sharply than in 2024, including a smaller rise in unemployment, a milder economic contraction, a smaller drop in commercial real estate prices, and a smaller decline in home prices.

These less destructive simulated downturns mean a smaller hit to banks’ balance sheets and a lower risk of failure. Because the banks had already passed the 2024 stress test, markets expected them to clear the 2025 test as well.

Michelle Bowman, the Fed’s vice chair for supervision, said in a statement: “Large banks remain well capitalized and resilient under a range of severe outcomes.” Bowman was appointed by President Donald Trump and was named vice chair for supervision earlier this month.

It is not clear why the Fed chose a milder test this year. In its statement, the Fed noted that past stress tests had shown “unexpected volatility” in the results and said it planned to seek public and industry feedback to adjust the tests in future years.

The Fed also chose not to subject banks to a more severe test of their exposures to private equity assets this year, saying such assets are typically held for the long term and are less likely to be sold during market stress.

The Fed likewise did not test any banks’ exposure to private credit. Private credit is described as an asset class worth about $2 trillion, and Fed researchers have also observed its worrying pace of growth. The Boston Fed recently said private credit could pose a systemic risk to financial stability in a severe adverse scenario, which is exactly what stress tests are designed to assess.

In the Fed’s press release, reporting, or methodological language this year, there was no wording or reference to testing or measuring private credit or private debt.

The Fed’s stress tests were created after the 2008 financial crisis to assess whether so-called too-big-to-fail banks could withstand a crisis similar to the one nearly 20 years ago. The tests are essentially an academic simulation: the Fed models a global economic scenario and measures its impact on banks’ balance sheets.

The 22 banks tested this time include leading institutions such as JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs. Together, they hold hundreds of billions of dollars in assets and operate across many parts of the U.S. and global economy.

Under this year’s scenario, a severe global recession would drive commercial real estate prices down 30%, home prices down 33%, unemployment up to 10%, and stock prices down 50%. In the 2024 scenario, commercial real estate prices fell 40%, stock prices fell 55%, and home prices fell 36%.

Now that they have “passed,” these major banks will be allowed to pay dividends to shareholders and buy back shares, returning capital to investors. Their dividend plans will be announced next week.