The largest U.S. banks passed the Federal Reserve's stress test: a loss of $708 billion was not a death sentence
The U.S. Federal Reserve has completed its annual stress test of the country's largest banks. The results are impressive: all 32 credit institutions that participated in the stress test demonstrated the ability to maintain capital above minimum requirements even under a hypothetical deep recession. At the same time, simulated losses on the loan portfolio reached an astronomical $708 billion.
The regulator assessed whether systemically important banks could continue lending to the economy during a downturn. The aggregate capital level fell by only 1.6 percentage points — from 12.8% to 11.2%, which is noticeably above the thresholds set by the regulator. This is clear evidence of the strength of the banking system.
What is built into the scenario?
The hypothetical scenario differed little from last year's. The Fed modeled a rise in unemployment to 10%, a 39% drop in commercial real estate prices, and a 30% decline in housing. In this model, the economy contracted by 4.6%, and stock indices plunged by 58%, amplifying losses on business loans.
The largest losses came from credit cards — about $200 billion. Losses on commercial and industrial loans amounted to approximately $160 billion, and on commercial real estate — another roughly $75 billion.
Why did the banks hold up?
Capital declined the most for two reasons: due to huge volumes of loan losses and strict assumptions in the stress model. Weaker expected investment income also played a role — the model incorporated a less significant rate cut than a year earlier.
However, higher interest income helped soften the blow. Strong recent bank results and a moderate rate cut in the scenario offset both negative factors. Fed Vice Chair for Supervision Michelle Bowman called the results proof of the banking sector's resilience.
"Today's results underscore the reliability of the banking system. We continue to make stress tests more transparent and convenient for everyone — public input will help us improve this process and strengthen confidence in its results," Bowman stated.
Capital requirements based on the test results will not change. Current standards will remain in effect until 2027 — when the Fed will introduce new calculation models developed with feedback in mind.
My analysis: The stress test results are a powerful signal for the market. In an era of uncertainty, when cryptocurrencies and traditional assets compete for capital, the stability of the U.S. banking system remains a key anchor. For crypto investors, this means that the likelihood of a systemic banking crisis that could trigger a flight to digital assets or, conversely, mass liquidation of positions, is currently minimal. However, it is worth remembering: stress tests are a model, and reality is always more complex.