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The US Federal Reserve has found that the country's 32 largest banks remain well-capitalised and capable of withstanding a severe economic downturn while continuing to lend. The annual stress test showed banks could absorb more than USD 700 billion in hypothetical losses and still remain above minimum capital requirements. Following the results, several major lenders, including JPMorgan Chase, Goldman Sachs, Morgan Stanley, State Street and Wells Fargo, announced dividend increases and share buyback plans. The findings also come as regulators consider broader changes to bank capital rules.
The US Federal Reserve said in its latest annual stress test that the country's 32 largest banks are well-positioned to withstand a severe economic downturn and continue supporting the economy through lending activities.
According to the central bank, the banks would be able to absorb more than USD 700 billion in hypothetical losses while remaining above minimum capital requirements. The exercise assessed how lenders would perform under a severe recession scenario marked by sharp declines in property values, rising unemployment and significant market volatility.
The test assumed a global recession in which real estate prices fall by one-third, unemployment rises to 10%, and financial markets experience substantial disruption. Despite these conditions, banks maintained capital levels above regulatory thresholds.
Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, said the results highlighted the strength of the US banking system.
Following the release of the stress test results, several major lenders announced higher shareholder payouts.
JPMorgan Chase said it would increase its quarterly common stock dividend to USD 1.65 per share in the third quarter and approved a new share repurchase programme. Goldman Sachs announced that its quarterly dividend would rise from USD 4.50 to USD 5 per share beginning next month, representing a 25% increase compared to last year.
Morgan Stanley increased its dividend by 15% to USD 1.15 per share and reauthorised a USD 20 billion share buyback programme. State Street said it would raise its dividend by 10%, while Wells Fargo indicated that it plans to increase its third-quarter dividend by 11% to USD 0.50 per share.
Under the stress scenario, banks recorded approximately USD 200 billion in credit card losses, USD 160 billion in losses from commercial and industrial lending, and USD 75 billion in losses tied to commercial real estate exposure.
The Federal Reserve said banks' aggregate high-quality capital ratio declined from 12.8% to 11.2% during the exercise. Among individual institutions, First Citizens posted the lowest stress capital ratio at 6.7%, while Charles Schwab recorded the highest at 32.2%.
The results were less consequential from a regulatory standpoint than in previous years. Earlier this year, the Federal Reserve announced that this year's stress test would not be used to update banks' stress capital buffers, an additional capital requirement that typically changes based on performance in the annual examination.
The central bank reiterated that it plans to update those buffers after the 2027 stress test, following ongoing efforts to revise stress-testing models and scenarios. The review comes after years of criticism from the banking industry, which has argued that aspects of the testing process lack transparency and rely too heavily on subjective assumptions.
The banking sector is also awaiting potential regulatory changes, including revisions to Basel-related risk-based capital requirements. Industry participants believe these changes could free up billions of dollars in capital that banks could either return to shareholders or use to support future business growth.
Analysts at KBW noted that banks continue to hold capital levels above regulatory requirements and remain well-positioned to benefit from any easing of capital regulations in the coming years.
Source Reuters
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