Large Banks Could Easily Weather a Massive Recession, Fed's Annual Stress Test Finds

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Key Takeaways

• The Federal Reserve's annual stress test found that large banks would remain resilient during an extreme recession.

• The annual stress test is designed to examine whether big banks could survive a hypothetical downturn without government assistance.

• The test results come as the central banks mulls over changes to the test that would make it more transparent.

The country’s biggest banks can comfortably stay afloat if a severe recession hits due to their sizable cushions, the Federal Reserve said in its latest health check on the industry.

The annual stress tests design a nasty scenario for the economy and examine whether big banks could survive it—without the need for government help, as in 2008. The latest results showed that banks such as JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America could comfortably withstand those blows and keep lending to households and businesses.

"Large banks remain well capitalized and resilient to a range of severe outcomes,” Fed Vice Chair for Supervision Michelle Bowman said in a press release.

This year's scenario was a little easier than in 2024, but it featured a brutal recession nonetheless. The Fed tested banks’ resilience under an unemployment rate that peaked at 10%, stock prices falling 50% and a roughly 30% drop in housing prices and commercial real estate values.

That hypothetical recession would inflict losses of $550 billion on the 22 banks the Fed tested, as credit card users, businesses and other borrowers default on their loans. However, all those banks would maintain cushions far above the minimum levels the Fed requires.

One key ratio the Fed uses to determine whether banks have enough capital would drop to 11.6% across the industry in its scenario, down from 13.4% at the end of 2024. But that is far above the minimum requirement of 4.5%.

Other banks the Fed reviewed this year include lenders such as PNC Financial Services, Capital One Financial, U.S. Bancorp, M&T Bank and Truist Financial. The exams also include major Wall Street banks such as Goldman Sachs and Morgan Stanley, as well as the U.S. branches of several big foreign banks.

The Financial Services Forum said in a statement the results “confirm the strong capital positions of the largest U.S. banks,” which have stayed resilient in the annual tests after more than a decade.

But Better Markets, an advocacy group that seeks stronger regulations, said that the tests' 100% track record shows they are “stressless, ineffective and endanger all Americans” by improperly measuring banks’ risks to a downturn.

What’s Next For the Stress Tests?

The results come as the Fed weighs a proposal to make banks’ yearly results less volatile and other changes that are likely to be industry-friendly.

Banks have long argued the Fed’s process is opaque and subject to unpredictable results, making banks less able to lend. However, critics say some opaqueness is precisely the point—since it makes the tests rigorous and limits banks’ ability to find workarounds.

Trade groups sued the Fed in December over the issue, a battle that’s since been paused now that the Fed is weighing changes to the annual exams. The Fed was partly hamstrung by a Supreme Court case last summer, which reined in federal regulatory agencies’ power.

On Friday, the Fed reiterated that it “intends to improve the transparency of the stress test process” by disclosing models to determine banks’ losses ahead of time. The agency says it would lead to valuable feedback that could improve whether the tests will adequately gauge risks.

The regulator is also proposing to reduce year-to-year volatility of stress test results by averaging out outcomes over two years.

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