Stress Test Pass Did Banks Really Ace It, or Was the Exam Just Easier?

Big Banks Pass Fed's Stress Tests, but Scrutiny Arises Over Less Stringent Criteria

The Federal Reserve recently announced that all major banks successfully navigated its annual "stress tests," designed to assess the resilience of the financial system. However, this year's evaluation has sparked debate due to its perceived leniency compared to previous assessments.

According to the Fed, the **22 banks** subjected to the tests demonstrated the capacity to remain solvent, surpassing minimum operational thresholds even after absorbing theoretical losses of approximately **$550 billion**. The simulated economic downturn featured less severe impacts than the 2024 scenario, including:

• A smaller increase in unemployment.
• A less pronounced economic contraction.
• A more moderate decline in commercial real estate prices.
• A gentler drop in housing prices.

These less drastic hypothetical conditions naturally resulted in less strain on bank balance sheets and a reduced risk of failure. Given the banks' successful performance in the more rigorous 2024 tests, a positive outcome in 2025 was widely anticipated.

"Large banks remain well capitalized and resilient to a range of severe outcomes," stated Michelle Bowman, the Fed's vice chair for supervision.

The rationale behind the Fed's decision to employ a less demanding test remains somewhat unclear. The central bank explained that previous tests exhibited "unintended volatility" in the results and intends to solicit feedback from the public and industry stakeholders to refine future stress test methodologies. Furthermore, the Fed opted to reduce the emphasis on banks' exposure to private equity assets, citing their long-term holding nature and infrequent sale during periods of financial distress.

Notably absent from this year's assessment was any consideration of banks' exposure to private credit, a substantial **$2 trillion** asset class. This omission is particularly noteworthy given that even Fed researchers have cautioned about the rapid growth of private credit and the potential systemic risks it could pose to the financial system under adverse conditions – precisely the type of scenario that stress tests are intended to evaluate. The Federal Reserve Bank of Boston recently highlighted this very concern.

The "stress tests," implemented in the wake of the 2008 financial crisis, serve as a crucial tool for evaluating whether the nation's largest banks can withstand economic shocks akin to those experienced nearly two decades ago. These tests involve simulating hypothetical global economic scenarios and assessing their potential impact on bank balance sheets.

The 22 banks scrutinized in these tests comprise industry giants such as **JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs.** These institutions possess substantial assets and operate diverse businesses spanning all sectors of the U.S. and global economies.

This year's hypothetical scenario envisioned a major global recession leading to a **30% decline in commercial real estate prices and a 33% decline in housing prices.** The unemployment rate would rise to **10%,** and stock prices would plummet by **50%.** In contrast, the 2024 scenario projected a **40% decline in commercial real estate prices, a 55% decline in stock prices, and a 36% decline in housing prices.**

Having successfully passed the stress tests, these major banks are now authorized to distribute dividends to shareholders and repurchase shares of stock, returning capital to investors. Dividend plans are expected to be announced in the coming week.

While the clean bill of health for these institutions provides a degree of reassurance, the questions surrounding the revised methodology underscore the importance of continuous refinement and rigorous oversight in safeguarding the stability of the financial system. The upcoming public and industry consultations will be critical in ensuring that future stress tests remain relevant and effective in identifying and mitigating potential risks.

Tags: Federal Reserve, Jerome Powell, Stress Tests, Banks, Financial System, Interest Rate, US Economy, Economic Contraction, Unemployment, Fed

Source: https://www.cnbc.com/2025/06/27/big-banks-all-pass-less-vigorous-federal-reserves-stress-tests.html