Federal Reserve Stress Test: All 22 Large Banks Passed, Paving the Way for Regulatory Easing

The latest stress test by the Federal Reserve shows that the largest banks in the United States can withstand severe economic recession shocks and have sufficient capital to absorb hundreds of billions of dollars in losses.

On June 27, according to an announcement from the Federal Reserve, in this test covering 22 banks with assets exceeding $100 billion, all institutions were able to maintain capital levels above regulatory requirements under extreme hypothetical scenarios. These banks include Wall Street giants such as JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.

Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, stated:

Large banks are well-capitalized and can withstand a range of severe shocks.

According to reports citing Federal Reserve officials, banks are expected to announce their repurchase plans next Tuesday. Following the release of the test results, U.S. bank stocks rose broadly in after-hours trading on Friday, with JPMorgan Chase up 0.57%, Wells Fargo up 1.89%, and Goldman Sachs up 2.31%.

Analysts suggest that this successful "pass" may accelerate significant adjustments to the capital framework of U.S. banks. Regulators have signaled that they are considering revising several core capital rules established in the post-crisis era.

Successful Test, Sufficient Capital Buffers

The stress test conducted by the Federal Reserve this year simulated scenarios including a nearly 8% decline in GDP, an unemployment rate soaring to 10%, a 33% drop in housing prices, and a 50% decline in the stock market.

Under this hypothetical scenario, the 22 banks as a whole would see their Common Equity Tier 1 (CET1) capital ratio drop to 11.6%, well above the minimum regulatory requirement of 4.5%.

The test results indicate that the banking system can withstand total losses exceeding $550 billion, including $148 billion in credit card losses, $124 billion in commercial loan losses, and $52 billion in commercial real estate losses.

It is noteworthy that this year's test shows a smaller decline in capital under stress scenarios compared to previous years. The Federal Reserve stated that this is due to model volatility and a milder degree of economic deterioration. Loan losses have also decreased compared to last year.

Ian Katz, Managing Director at Capital Alpha Partners in Washington, stated that less stringent testing means banks may have lower capital requirements, allowing for larger dividends and stock buybacks. Banks typically use the annual Federal Reserve test results to determine how much capital to retain on their balance sheets to absorb shocks and how much funding is available for dividends and buybacks.

Paving the Way for Easing Capital Rules

The results of this test provide strong support for the Trump administration's regulatory easing agenda, which aims to stimulate credit and drive economic growth by reducing regulatory constraints.

Just earlier this week, U.S. regulators proposed adjustments to the so-called "Enhanced Supplementary Leverage Ratio (eSLR)," which is seen as one of the most significant rollbacks of capital rules since the 2008 financial crisis The banking industry has long complained that the ratio imposes an unfair capital penalty due to its holdings of low-risk assets such as U.S. Treasury bonds.

Bowman, the top banking regulator at the Federal Reserve appointed by Trump, made it clear in a speech on Monday that revisiting the eSLR requirements is just the beginning of broader capital rule adjustments. She stated:

There is more work to be done regarding capital requirements, particularly in considering how they evolve and whether changes in market conditions reveal issues that need to be addressed.

Other capital requirements under consideration for adjustment include additional fees for Global Systemically Important Banks (G-SIBs) and asset thresholds that define the regulatory rigor for different institutions.

Additionally, it has been reported that the Federal Reserve will host a meeting on July 22 to convene leaders from various sectors to discuss the capital framework for U.S. banks. JPMorgan Chase CEO Jamie Dimon has previously called on the government to consider a series of broad reforms