The Federal Reserve announced that all 22 of the United States’ largest banks successfully passed its 2025 annual stress tests. These tests, designed to assess whether banks can withstand a severe economic downturn, showed that all institutions remained solvent even after modeling roughly $550 billion in theoretical losses. However, this year’s test was less intense than in 2024, featuring a milder recession scenario with less severe unemployment, housing market declines, and commercial real estate losses.
Fed Cites Global Weakness, Eases Stress Test Severity Amid Leadership and Method Change
The Fed justified the less rigorous test by citing a general weakening of the global economy, which, in turn, informed the parameters of the 2025 simulation. Compared to last year, the downturn scenario was scaled back: the projected unemployment rate was lower, and drops in commercial and residential real estate values were not as steep. Given that the banks had already passed more stringent conditions in 2024, their success in 2025 was widely anticipated.
All 22 Major U.S. Banks Pass Softer 2025 Fed Stress Test Despite Private Credit ConcernsMichelle Bowman, the Fed’s new Vice Chair for Supervision, reaffirmed the strength of the banking system, saying that the institutions remain “well capitalized and resilient.” Bowman, a Trump appointee, took on the role earlier this month. Meanwhile, the Fed acknowledged that previous test results had shown “unintended volatility” and said it would seek public and industry feedback to refine the stress testing process going forward.
Fed Excludes Private Credit Risks, Sparking Concern Over Incomplete Bank Stress Evaluation
A key criticism of this year’s tests is the Fed’s decision to exclude evaluations of bank exposure to private equity and private credit. Private credit, a fast-growing $2 trillion asset class, has been flagged by Fed researchers as a potential systemic risk in the event of a severe downturn. While the Fed did perform a separate “exploratory analysis” of private credit and found banks generally well-positioned, this analysis was not included in the official stress test.
The stress tests, a regulatory tool introduced after the 2008 financial crisis, help ensure that the country’s largest banks can endure future economic shocks. This year’s tests involved top financial institutions like JPMorgan Chase, Bank of America, and Goldman Sachs.
The 2025 scenario included a 30% fall in commercial real estate, a 33% drop in housing prices, and a 50% decline in stock markets, along with 10% unemployment. With passing results, these banks are now cleared to issue dividends and conduct stock buybacks, with announcements expected next week.
