Fed annual stress test finds banks resilient in severe recession scenario

The Federal Reserve’s annual stress test found that the nation’s largest banks remain well-positioned to withstand a severe economic downturn, with all 32 institutions tested maintaining capital levels above regulatory minimums despite projected losses exceeding $708 billion.

The 68-page test results, released Thursday, showed that large banks would continue lending to households and businesses even under a hypothetical recession scenario that included sharp declines in commercial real estate and housing prices, along with a spike in unemployment.

The annual stress exercise is part of the Federal Reserve’s “supervision efforts” and “as required by the Dodd-Frank Act.” The document also said that the stress test assesses how large banks are likely to perform under hypothetical economic conditions.

The annual exercise evaluates whether major U.S. banks have sufficient capital to absorb losses during a severe economic shock. This year’s scenario envisioned a global recession featuring a 39% decline in commercial real estate prices, a 30% drop in home prices and unemployment rising to 10%.

“Today’s results underscore the strength of the banking system,” Federal Reserve Vice Chair for Supervision Michelle Bowman said in a statement. “As we work to increase the transparency and accountability of the stress test, public feedback will help us continue to improve and instill greater confidence in the stress test and its results.”

Under the scenario, banks collectively would incur more than $708 billion in losses, including roughly $200 billion tied to credit cards, $160 billion from commercial and industrial loans and $75 billion from commercial real estate lending.

This year, 32 banks participated in the test, including Ally Financial, Inc., American Express, Barclays US and Wells Fargo, among others.

“The 2026 stress test results show that the 32 large banks subject to the test this year have sufficient capital to absorb nearly $708 billion in losses and continue lending to households and businesses under hypothetical stressful conditions,” the test reads.

Despite the projected losses of $708 billion, the aggregate common equity tier 1 (CET1) capital ratio for the tested banks declined by only 1.6 percentage points and remained above minimum regulatory requirements.

The Fed said three primary factors shaped this year’s results. Higher projected loan losses, driven by larger loan balances and more severe economic assumptions, reduced capital levels. Capital was also pressured by lower projected unrealized gains on securities because the scenario assumed smaller declines in interest rates.

Those factors were more than offset by higher projected interest income, reflecting recent bank earnings performance and the scenario’s smaller assumed interest-rate declines, the central bank said.

The Fed noted that this year’s results will not affect large-bank capital requirements, which were published Thursday separately. Current capital requirements will remain in place until 2027, when the stress test will incorporate updates to the Fed’s loss-estimating models based on public feedback.