Federal Reserve stress test results: All 22 major banks pass, but the test was more lenient

The Federal Reserve said the major banks all passed the annual "stress test," but this year's test was significantly less severe than in previous years.

The Fed said the 22 banks tested this year would remain solvent and above the minimum threshold needed to keep operating even after absorbing about $550 billion in hypothetical losses.

Under the scenarios set by the Fed, the projected declines in this year's test were relatively smaller than in 2024, including a smaller rise in unemployment, a milder economic contraction, and smaller drops in commercial real estate and home prices.

These less severe (though simulated) downturns mean banks would face less potential damage to their balance sheets and a lower risk of failure. Since the banks already passed the 2024 test, passing again in 2025 was expected.

In a statement, the Fed's vice chair for supervision said large banks still have ample capital and can withstand a range of severe outcomes. She said the stress tests show the resilience of large banks in harsh scenarios.

It is not yet clear why the Fed chose a more "lenient" stress test this year. In its explanation, the Fed said previous tests had produced "unexpected volatility" in the results and planned to seek public and industry input in future years to adjust the stress tests.

At the same time, the Fed chose not to apply a more stringent stress test to banks' private equity exposures this year. Its reasoning was that private equity assets are typically held for the long term and generally are not forced to be sold during periods of market stress.

The Fed also did not include an assessment of banks' exposure to private credit in this year's test. This asset class is worth about $2 trillion, and even Federal Reserve researchers have noted its concerning growth rate. The Boston Fed recently said private credit could pose a systemic risk to the financial system in a severe adverse scenario, and stress tests are designed to assess such risks.

In this year's press release, related report, and test methodology, the Fed did not use any wording about testing or measuring private credit or private debt.

Federal Reserve stress tests were created after the 2008 financial crisis to assess whether "too-big-to-fail" banks can withstand crisis-like shocks. The tests are, in essence, an academic simulation: the Fed sets scenarios for the global economy and measures their impact on banks' balance sheets.

The 22 banks tested this year include major institutions such as JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs. Together, these firms hold hundreds of billions of dollars in assets and operate across many sectors of the U.S. and global economy.

In this year's hypothetical scenario, if a severe global recession were to occur, commercial real estate prices would fall 30%, home prices would drop 33%, unemployment would rise to 10%, and stock prices would fall 50%. In the 2024 scenario, commercial real estate prices fell 40%, stock prices fell 55%, and home prices fell 36%.

After passing the stress test, major banks will be allowed to pay dividends to shareholders and buy back shares to return money to investors. Dividend plans are expected to be announced next week.