Major Banks Pass Fed Stress Tests, But Less Rigorous Scenarios Raise Questions
Major Banks Pass Fed Stress Tests, But Less Rigorous Scenarios Raise Questions
The nation’s largest financial institutions have successfully cleared the Federal Reserve’s annual “stress tests,” the central bank announced Friday, confirming their resilience against potential economic downturns. However, the 2025 evaluation was notably less stringent than previous years, prompting scrutiny over the test’s scope.
All 22 major banks subjected to the tests, including giants like JPMorgan Chase, Citigroup, and Bank of America, demonstrated their ability to absorb significant theoretical losses—estimated at $550 billion—while remaining solvent and above minimum operating thresholds. The simulated scenario for this year projected a less severe economic contraction compared to 2024, featuring smaller hypothetical declines in unemployment, commercial real estate, and housing prices.
Federal Reserve Vice Chair for Supervision, Michelle Bowman, affirmed that “Large banks remain well capitalized and resilient to a range of severe outcomes.” Yet, the central bank acknowledged that it opted for a less vigorous test due to “unintended volatility” in past results, indicating plans to solicit public and industry feedback for future test adjustments.
A key point of contention is the Fed’s decision to reduce scrutiny on banks’ exposure to private equity assets and completely omit testing for the rapidly growing $2 trillion private credit market. This omission comes despite warnings from some Fed researchers, including the Federal Reserve Bank of Boston, about private credit’s potential as a systemic risk under adverse conditions—precisely what the stress tests are designed to assess.
The stress tests, established post-2008 financial crisis, aim to gauge the resilience of “too big to fail” banks. With their successful passage, these major banks are now cleared to distribute dividends to shareholders and initiate stock buybacks, with specific plans expected to be unveiled next week.
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