The Federal Reserve has declared the U.S. banking system indestructible: a stress test with $708 billion in losses has been passed.
The U.S. Federal Reserve has released the results of its annual stress test for the country's largest banks. The conclusion is clear: all 32 systemically important credit institutions maintain capital above minimum requirements, even under a simulated severe recession. The hypothetical scenario included total credit portfolio losses of $708 billion.
What is included in the scenario?
The stress test, mandatory for banks with assets of $100 billion or more (the sample included JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley), modeled extremely harsh macroeconomic conditions. In the hypothetical model, the regulator assumed unemployment would rise to 10%, commercial real estate would fall by 39%, and residential real estate by 30%. The economy contracts by 4.6%, and stock indices drop by 58%, sharply increasing pressure on corporate lending.
Where are the main losses concentrated?
The largest losses predictably came from the credit card portfolio—about $200 billion. Corporate and industrial loans generated approximately $160 billion in losses, and commercial real estate loans around $75 billion. However, despite these massive figures, the aggregate capital level of banks fell by only 1.6 percentage points—from 12.8% to 11.2%. This is well above the Fed's minimum requirements.
Why did the system hold up?
A key factor that softened the blow was banks' high interest income. The model assumed less aggressive rate cuts than a year earlier, allowing credit institutions to generate enough profit to cover losses. Additionally, strong financial results from recent quarters played a role. As Fed Vice Chair for Supervision Michelle Bowman noted, the test results are direct evidence of the banking sector's resilience.
"Today's results underscore the strength of the banking system. We continue to make stress tests more transparent and accessible for everyone—public input will help us improve this process and strengthen confidence in its outcomes," Bowman stated.
Capital requirements based on the test results will not change. Current standards will remain in effect until 2027, after which the Fed will introduce new calculation models developed with feedback from market participants. This means banks will operate in a familiar regulatory environment for the next three years, providing certainty to the market.
Analyst comment: Passing the stress test with losses of $708 billion is undoubtedly a strong signal for the market. However, it is worth remembering that the Fed's model does not account for scenarios of a systemic liquidity crisis, like the one we saw in 2023 with the collapse of Silicon Valley Bank. Capital resilience is important, but it is not the only factor for stability. The real test for the banking system will come when high inflation and tight monetary policy begin to genuinely pressure asset quality.