Fed: 2025 stress test shows banks ‘well positioned’ to withstand severe recession

The 22 large banks subjected to the Federal Reserve Board’s 2025 stress test reportedly are “well positioned” to withstand a hypothetical, severe recession while remaining above their minimum capital requirements and continuing to lend to households and businesses, the Fed said.

The Fed said that in this year’s hypothetical test scenario, the aggregate decline in the common equity tier 1 (CET1) capital ratio, which provides a cushion against losses, is 1.8 percentage points. It said the decrease is smaller than the aggregate decline observed in recent years and, in part, reflects unintended volatility in the models used for the stress tests. “The Board intends to address this issue when it discloses and seeks public comment on models and its scenario design framework later this year,” it said.

It also said that under its proposed rule in April to average stress test results over two consecutive years – the aim being to reduce volatility from the stress test when calculating a firm’s capital requirement – banks in this year’s test would have shown an aggregate capital decline of 2.3 percentage points.

The 2025 stress scenario, it said, was less severe than last year’s due to the test’s countercyclical design. It includes a severe global recession with a 30% decline in commercial real estate prices and a 33% decline in house prices. The unemployment rate rises nearly 5.9 percentage points to a peak of 10%, and economic output declines commensurately, it said.

The Fed said main factors influencing the results of this year’s test are:

• Lower loan losses in a less severe scenario, due to the mild slowing of the U.S. economy in 2024 and the countercyclical nature of the Board’s scenario design;
• Lower private equity losses due to the Board adjusting how these exposures are measured to better align with these exposures’ characteristics; and
• Higher net revenue due to the effect of improved bank performance and atypical trading positions as viewed through the lens of the supervisory stress test framework.

The Fed said it expects banks to wait until after 4:30 p.m. eastern July 1 to publicly disclose any information about their planned capital actions and preliminary stress capital buffer requirements.

Federal Reserve Board’s annual bank stress test showed that large banks are well positioned to weather a severe recession, while staying above minimum capital requirements and continuing to lend to households and businesses