America’s Biggest Banks Pass Fed’s Brutal Stress Test-Here’s What It Means for You

US Recession | Image:
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The Federal Reserve announced on Saturday that America’s largest banks have successfully passed its annual stress test, proving they could weather a severe global recession while maintaining enough capital to continue lending to households and businesses.

According to the US central bank’s statement, all 22 of the big banks tested stayed above their minimum Common Equity Tier 1 (CET1) capital requirements in the Fed’s hypothetical severe downturn scenario. This annual assessment is designed to ensure that the country’s financial system remains robust even in the face of extreme economic shocks.

“This year’s stress test results show that large banks remain well-capitalised and resilient to a range of severe outcomes,” said Michelle W. Bowman, the Fed’s Vice Chair for Supervision. She added that to reduce excessive volatility in capital requirements from year to year, the Board is considering finalising a proposal that would average two consecutive years of stress test results—a plan first floated in April.

The Fed’s stress test estimates bank losses, net revenue, and capital levels under hypothetical recession scenarios. The 2025 scenario included a severe global recession marked by a 30% decline in commercial real estate prices, a 33% drop in house prices, unemployment spiking nearly 5.9 percentage points to 10%, and a sharp decline in economic output.

Despite these grim assumptions, banks were shown to have enough capital buffers to absorb significant losses while continuing to meet their obligations and support credit to the real economy. The Fed emphasised that the stress test is countercyclical by design—this year’s scenario was less severe than last year’s because overall risk in the financial system had declined.

The central bank also released corrected 2024 stress test results after finding modest errors in projected losses for corporate and first-lien mortgage loans. However, it clarified that these corrections did not change the overall capital decline figures for 2024.

What Is a Stress Test?

Stress tests are a key regulatory tool introduced after the 2008 financial crisis to prevent a repeat of the systemic collapse caused by undercapitalised banks. By publicly disclosing results, the Fed aims to bolster market confidence in the banking system’s ability to endure even the harshest economic shocks.

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