Federal Reserve Governor Michelle Bowman, U.S. President Donald Trump’s nominee for Federal Reserve Vice Chairman for Supervision, testifies before a Senate Banking, Housing, and Urban Affairs Committee confirmation hearing on Capitol Hill in Washington, DC, U.S., April 10, 2025.
Kevin Mohatt | Reuters
America’s largest banks would be able to absorb more than $708 billion in losses in a severe global recession while continuing to lend to households and businesses, according to the Federal Reserve’s annual stress test released Wednesday.
All 32 banks examined by the Fed remained above their minimum capital requirements under the regulator’s hypothetical scenario, which included unemployment rising to 10%, a 39% drop in commercial real estate prices and a 30% drop in real estate prices.
The industry’s Common Equity Tier 1 ratio, a key capital measure that would help absorb losses in an economic downturn, fell 1.6 percentage points during the fiscal year, remaining comfortably above required minimums. Projected losses for the group included about $200 billion related to credit cards, $160 billion from commercial and industrial loans and $75 billion related to commercial real estate.
“Today’s results underscore the strength of the banking system,” Michelle Bowman, Federal Reserve vice chair for supervision, said in a statement.
This annual exercise comes at a pivotal time for banking regulation because, unlike in previous years, the results will not affect the amount of capital that big banks are required to hold.
Indeed, the Fed said in February that it would leave stress test reserves unchanged until 2027 while regulators rework the methodology, taking into account industry complaints, a move that could potentially reshape the amount of capital companies must hold in anticipation of future downturns.
In a June 21 research note describing this year’s exercise as “a motion-setting exercise,” KBW analysts led by Christopher McGratty said banks would likely remain focused on the Basel III Endgame proposal expected later this year rather than the stress test results themselves.
KBW estimates that if this year’s results had been taken into account in the capital requirements, Morgan Stanley, Citi Group, Citizens’ Financial And KeyCorp would have seen some of the largest reductions in capital buffers.