Major Banks Pass 2025 Stress Test: Bigger Payouts in the Cards?

The results of the much-awaited annual stress test are out. As expected, the 22 banks that were tested have easily passed this year’s annual health checkup, given that the 2025 scenario used to test the banks was less severe than last year.

The Federal Reserve’s vice chair for supervision, Michelle Bowman, said, “Large banks remain well capitalized and resilient to a range of severe outcomes.”

Thus, the largest U.S. lenders, which include JPMorgan JPM, Bank of America BAC and Goldman Sachs GS, will be able to withstand a severe recession with sufficient capital on hand to absorb hundreds of billions of dollars in losses.

What is a Stress Test?

Each year, the Federal Reserve’s stress test assesses the capacity of the biggest U.S. banks to withstand a significant economic downturn. The test is used to determine the most recent minimum capital requirements, which are intended to cushion potential losses. It further dictates the size of share repurchases and dividends.

The 2008 financial crisis gave rise to this annual assessment, which covered institutions with at least $100 billion in assets.

The Fed evaluates the financial resilience of banks by estimating losses, revenues, expenses and resulting capital levels under hypothetical economic conditions. A baseline scenario and a severely adverse scenario are used for assessment.

The severely adverse scenario is characterized by a hypothetical severe global recession accompanied by a period of heightened stress in commercial and residential real estate markets, and corporate debt markets.

Details of This Year’s Test

This year, the severely adverse scenario featured a slightly smaller increase in the unemployment rate from the 2024 scenario. It also featured a smaller decline in house prices and a fall in commercial real estate prices that is 10% less than that in 2024.

All the 22 lenders that have passed the test show that their capital levels will stay above the key threshold in a scenario where GDP contracts by 8%, commercial real estate prices decline by 30%, there is a 33% decline in house prices and the unemployment rate rises to 10%.

The minimum common equity tier 1 capital ratio that is required to pass the test is 4.5%. This year, all the banks as a group had a common equity tier 1 ratio of 11.6% during the stress scenario, after absorbing total projected hypothetical losses of more than $550 billion.

The projected loss includes nearly $158 billion in credit card losses, $124 billion in losses from commercial and industrial loans, and $52 billion in losses from commercial real estate.

Now, as the banks have passed the stress test displaying sufficient capital on hand, they will be able to issue dividends to shareholders and buy back shares to return proceeds to investors.

Moreover, with all the banks passing the test, the Trump administration will now be in a position to make its case that rules for financial institutions should be lessened. The Trump administration implements a deregulatory agenda because it is of the view that it will boost lending and drive economic growth.

Easing Regulation in the Cards?

A couple of days ago, the Fed unveiled a proposal to ease the enhanced Supplementary Leverage Ratio (SLR) to reduce capital requirements significantly for major U.S. banks, including JPM, BAC and GS.

Banks have been complaining that the SLR penalizes them for holding lower-risk assets such as Treasury bonds.

Thus, such a proposal could make it easier for these banks to handle these low-risk assets and free billions in capital currently tied up due to the post-2008 leverage requirements.

Details of the Proposed Plan

The Fed’s proposal would lower capital requirements for Global Systemically Important (GSIBs) banks like JPM, BAC and GS by 1.4%, or $13 billion. More substantially, it would reduce capital requirements for depository institution subsidiaries of banks by 27% or $213 billion.

Under the proposed rule, the Fed would replace the current 2% enhanced SLR buffer with a buffer equal to half of each bank’s GSIB surcharge. Similarly, the 3% ESLR buffer for global bank subsidiaries would be replaced with half of each bank’s GSIB surcharge.

The easing of these requirements could directly benefit major banks by reducing the amount of capital they must hold in reserve. This will likely give them more flexibility to expand operations, particularly in lending and Treasury trading.

Additionally, lower capital buffers could enhance bank profitability by freeing funds for investment or business expansion.

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This article originally published on Zacks Investment Research (zacks.com).

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