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The Federal Reserve Board has announced the results of its 2025 annual bank stress test, and the findings are positive. According to the report, large U.S. banks are strong enough to survive a severe recession, while still maintaining required capital levels and continuing to provide loans to both individuals and businesses.
What Is the Stress Test?
The stress test is a financial “health check” conducted by the Federal Reserve every year. It checks whether big banks can survive an economic crisis like a deep recession. This year’s test showed that even in a tough situation, all 22 tested banks would stay above the minimum required capital levels, meaning they have enough money to absorb losses and continue operations.
Key Capital Ratio Drops by 1.8 Percentage Points
Under the hypothetical recession scenario:
- The common equity tier 1 (CET1) capital ratio, which acts as a safety cushion for banks, fell by 1.8 percentage points.
- This is less than the drop seen in previous years.
The Fed is considering a new rule that would average the stress test results over two years instead of one, to avoid wild swings in results. If this new rule is implemented, the capital decline would be 2.3 percentage points, when averaged with last year’s results.
Volatility in the Models Being Reviewed
The Federal Reserve admitted that some unexpected fluctuations in their stress test models may have led to this year’s slightly lower capital drop. Officials said they are working on improving these models and will release them for public feedback later this year.
Michelle W. Bowman, Vice Chair for Supervision, said:
“Large banks remain well-capitalized and resilient… Averaging results over two years could help reduce unnecessary volatility in stress test outcomes.”
Big Picture: Banks Absorbed Over $550 Billion in Hypothetical Losses
Even with severe recession conditions, the 22 big banks tested were able to absorb over $550 billion in total projected losses, including:
- $158 billion in credit card loan losses
- $124 billion in business (commercial & industrial) loan losses
- $52 billion in commercial real estate loan losses
What Was This Year’s Hypothetical Scenario?
The 2025 scenario was slightly less harsh than last year’s, but still severe:
- A 30% drop in commercial real estate prices
- A 33% fall in home prices
- The unemployment rate rising to 10% (a 5.9% increase)
- A major drop in overall economic output
This stress scenario was designed with a countercyclical approach, meaning it becomes slightly less severe during already slowing economic conditions — like what the U.S. experienced in 2024.
Why Results Improved This Year
Three main reasons helped banks perform better in the 2025 test:
- Lower loan losses due to a less severe economic scenario.
- Smaller private equity losses, as the Fed changed how they measure certain risky investments.
- Higher net revenue, as many banks had stronger earnings and some benefited from unusual trading positions.
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