Fed Stress Test Passed, but the Bar Was Lower: A 2025 Review
The Federal Reserve said Friday that all major banks passed its annual stress test, but this year’s test was noticeably 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.
In this year’s scenario, several shocks were smaller than in the 2024 test, including a smaller rise in unemployment, a less severe economic contraction, smaller declines in commercial real estate prices, and smaller drops in home prices.
Those relatively mild, though still simulated, shocks imply less potential damage to bank balance sheets and therefore a lower risk of failure. Because banks already passed the 2024 stress test, markets expected them to pass again in 2025.
Michelle Bowman, the Fed’s vice chair for supervision, said: “Large banks remain well capitalized and resilient under a range of severe outcomes.” Bowman, a Trump appointee, took over the role earlier this month.
It is not clear why the Fed chose a less severe test. In its statement, the Fed said prior tests showed “unintended volatility” in the results and plans to seek public and industry input in future years to refine the stress test. The Fed also chose to test banks less on their private equity exposures, saying those assets are usually held long term and are not normally sold during periods of market stress.
The Fed also did not test banks’ exposure to private credit this year. That asset class is worth about $2 trillion, and Fed researchers themselves have warned that its growth is concerning. The Boston Fed recently said private credit could pose a systemic risk to financial stability in a severe adverse scenario, which is exactly the kind of risk stress tests are meant to assess.
None of the Fed’s news release, report or methodology this year mentioned testing or measuring private credit or private debt exposures.
The Fed’s stress test began after the 2008 financial crisis to assess whether the so-called too-big-to-fail banks could withstand shocks similar to those seen nearly two decades ago. At its core, the stress test is an academic simulation: the Fed runs a global economic scenario and measures its effect on bank balance sheets.
The 22 banks tested this year were all major institutions such as JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs. Together, they hold hundreds of billions in assets and operate across many parts of the U.S. and global economy.
In this year’s hypothetical scenario, a severe global recession would push commercial real estate prices down 30% and home prices down 33%. Unemployment would rise to 10%, and stock prices would fall 50%. By comparison, the 2024 hypothetical scenario called for commercial real estate prices to fall 40%, stock prices to drop 55% and home prices to decline 36%.
With the test passed, large banks will be allowed to pay dividends to shareholders and buy back stock to return capital to investors. Their dividend plans are expected to be announced next week.
