The 31 major U.S. banks that took part in a Federal Reserve stress test are all expected to be able to weather a severe global recession, a new show of strength as they push back on tougher regulations that would require them to hold more capital.
Results released Wednesday by the Fed show that these banks would have enough capital on hand to absorb losses and continue lending during a two-year scenario in which U.S. unemployment rises to 10%, commercial real estate prices drop by 40% and the stock market plummets. %.
Their losses in this simulation collectively amounted to $685 billion. That included $175 billion from credit cards, $142 billion from business loans and nearly $80 billion from commercial real estate.
The largest of the group – JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS) and Morgan Stanley (MS) – are all said to have capital buffers close to double the Fed’s minimum requirement of 4.5% in this extreme scenario.
Larger regional banks such as PNC (PNC) and Truist (TFC), Regions (RF), Citizens (CFG) and M&T Bank (MTB) also had relatively higher capital levels than the minimum.
One regional bank that has struggled this year, New York Community Bancorp (NYCB), was not part of the latest test. Instead, it will be examined in 2025.
“The goal of our test is to ensure that banks have sufficient capital to absorb losses in a highly stressed scenario,” Michael Barr, the Fed’s vice chairman for supervision, said in a statement. “This test shows that is the case.”
But there were signs of some new weaknesses, despite all banks receiving a satisfactory rating.
The overall decline in bank capital ratios during a hypothetical downturn was greater than the decline banks recorded in last year’s test, when fewer lenders were surveyed.
“The test resulted in higher losses because banks’ balance sheets are somewhat riskier and costs are higher,” Barr added.
He cited three key factors driving the capital decline: “substantial” increases in banks’ credit card balances, riskier corporate loan portfolios and lower expected revenues due to higher expenses and lower commission income.
The results varied widely between banks. The bank with the highest credit losses under the Fed’s “severely adverse scenario” was Discover (DFS), followed by Capital One (COF).
Capital One agreed earlier this year to buy Discover in a deal that still needs regulatory approval to close.
The bank with the lowest number of loan losses was Charles Schwab (SCHW).
The Fed first began applying stress tests to a broad group of banks in the wake of the last financial crisis. It became mandatory annually for institutions with more than $100 billion in assets as part of legislation passed in 2010.
A law passed in 2018 tailored the tests to the size of the banks, meaning banks between $100 billion and $250 billion would be tested every two years.
Some Democrats and regulators last year were critical of that 2018 adjustment, arguing it could have helped avoid the problems that had accumulated at Silicon Valley Bank, which was not stress-tested before it failed in 2023.
Banks typically use the results of the Fed’s annual stress tests to determine how much to hold on their balance sheets to absorb shocks and how much to keep for dividends and buybacks.
Some banks are expected to announce late on Friday how much money they now want to return to shareholders.
Any move will “likely be modest for many” until lenders get more clarity from regulators on a new set of capital requirements proposed last year, RBC Capital Markets analyst Gerard Cassidy said.
The original version called for an increase in capital levels by a total of 16% and banks have aggressively pushed back on this plan over the past year.
Regulators have indicated that changes are coming, with Barr saying in May that he expects “broad and material changes” to the proposal.
Bloomberg reported this week that a new proposal could cut capital raises by up to 5%.
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