Lower-than-expected capital impact sets positive tone for lending and returns
All 22 of the largest US banks passed the Federal Reserve’s latest stress test, confirming they have the capital strength to weather a severe economic downturn.
The results, released Friday, offer reassurance to investors and regulators and open the door for banks to move forward with billions of dollars in dividends and share buybacks.
“Large banks remain well capitalized and resilient to a range of severe outcomes,” said Michelle Bowman, the Fed’s vice chair for supervision.
This year’s hypothetical scenario modeled steep economic shocks, including a 30% drop in commercial real estate prices, a 33% decline in home prices, and unemployment spiking to 10%. Even under that pressure, banks’ Common Equity Tier 1 (CET1) capital ratio fell by only 1.8%, remaining well above the 4.5% regulatory minimum.
The Fed also highlighted how the results would look under a proposed rule that averages stress test outcomes over two years. In that case, the CET1 ratio would have dropped by 2.3 percentage points – still within safe levels.
Bowman urged the Fed to finalize the rule to give banks more consistency in planning for capital requirements.
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Manageable losses
While the test projected significant losses across key credit categories – including $158 billion in credit card debt, $124 billion in commercial and industrial loans, and $52 billion tied to commercial real estate – the overall capital impact was manageable. A milder macroeconomic backdrop compared to previous years, along with improved bank revenues from core lending and trading activities, helped offset some of the pressure.
The outcome was broadly expected and welcomed by analysts.
“All the participant banks passed the stress test (which was not a surprise), and this lends support to our view that they remain well-positioned to return capital should they so choose,” analysts at RBC Capital Markets wrote in a note.
Markets responded positively to the results. Shares of Goldman Sachs jumped nearly 2% in early trading on Monday, while Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo posted gains ranging from 0.5% to 1.5%. The S&P 500 Banks Index rose nearly 1%, continuing to outperform the broader market this year.
Goldman Sachs, Wells Fargo, Citigroup, and M&T Bank were all cited by analysts for showing meaningful declines in their stress capital buffers, or SCBs, an important factor in determining how much capital banks must hold in reserve. M&T shares rose 0.6% on the news.
“Very strong result for Goldman Sachs in terms of both the result and some additional validation of the evolution of the business model under this management team,” analysts at Citigroup noted.
Less harsh than 2024 test
The 2025 test was viewed as less severe than last year’s. Because the real economy had already weakened slightly heading into this cycle, the hypothetical downturn, though still severe, was seen as somewhat less punishing.
Analysts at Bank of America said the average year-over-year decline in SCBs was around 100 basis points, well above investor expectations, which had hovered around 30 to 50 basis points.
There were no negative surprises in this year’s results, according to TD Cowen, with most banks reporting increases in excess capital. Still, some industry voices continue to argue that the stress test regime is too rigid and restricts capital returns, even for banks that demonstrate strong performance under stress.
Originally introduced under the Dodd-Frank Act after the 2008 financial crisis, the stress test is meant to prevent systemic failures by assessing whether the biggest banks can continue lending in an economic shock. This year’s results suggest they can.
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