Federal Reserve says all 31 banks in annual stress test withstood a severe hypothetical downturn

The Federal Reserve announced on Wednesday that the largest banks operating in the U.S. would be able to withstand a severe recession scenario while continuing to lend to consumers and corporations.

All 31 banks in this year's regulatory exercise passed the requirement to absorb losses while maintaining capital levels above the minimum required, the Fed said in a statement.

The stress test assumed unemployment surges to 10%, commercial real estate values drop 40%, and housing prices fall 36%.

"This year's results show that under our stress scenario, large banks would take nearly $685 billion in total hypothetical losses, yet still have considerably more capital than their minimum common equity requirements," said Michael Barr, the Fed's vice chair for supervision. "This is good news and underscores the usefulness of the extra capital that banks have built in recent years."

The Fed's stress test is an annual exercise that ensures banks maintain adequate cushions for bad loans and dictates the size of share repurchases and dividends. This year's test included major banks like JPMorgan Chase and Goldman Sachs, credit card companies such as American Express, and regional lenders like Truist.

While no bank appeared to struggle significantly in this year's test, which had roughly the same assumptions as the 2023 test, the group's aggregate capital levels fell by 2.8 percentage points, which was worse than last year's decline.

This drop is attributed to the industry holding more consumer credit card loans and corporate bonds that have been downgraded. Additionally, lending margins have been squeezed compared to last year, according to the Fed.

"While banks are well-positioned to withstand the specific hypothetical recession we tested them against, the stress test also confirmed that there are some areas to watch," Barr said. "The financial system and its risks are always evolving, and we learned in the Great Recession the cost of failing to acknowledge shifting risks."

The Fed also conducted an "exploratory analysis" of funding stresses and a trading meltdown that applied only to the eight largest banks.

In this analysis, the banks managed to avoid disaster despite a sudden surge in deposit costs combined with a recession. In a scenario where five large hedge funds collapse, the big banks would lose between $70 billion and $85 billion.