The U.S. Federal Reserve announced on Wednesday that 32 of the nation’s largest banks are robustly positioned to navigate a severe economic downturn while continuing to lend. Results from the central bank’s annual “stress test” indicated these firms could absorb over $700 billion in hypothetical losses and comfortably remain above minimum capital requirements. “Today’s results underscore the strength of the banking system,” stated Fed Vice Chair for Supervision Michelle Bowman, highlighting the sector’s resilience.
The rigorous assessment simulated a hypothetical global recession, characterised by a one-third drop in real estate prices, unemployment soaring to 10%, and widespread financial market turmoil. Despite these extreme conditions, large banks’ aggregate capital levels dipped by only 1.6 percentage points, maintaining a strong position above the required minimums. Under this scenario, banks collectively registered approximately $200 billion in credit card losses, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate. The aggregate high-quality capital ratio for banks decreased from 12.8% to a low of 11.2% during the examination.
Following the positive stress test outcomes, several prominent banks moved to increase shareholder returns. JPMorgan announced an increase in its quarterly common stock dividend to US$1.65 per share for the third quarter, alongside authorising a new share buyback programme. Goldman Sachs revealed a 25% increase in its common dividend, moving from US$4.50 to US$5 per share next month. Morgan Stanley elevated its dividend by 15% to US$1.15 per share and reauthorised a US$20 billion share buyback, while State Street will boost its dividend by 10%. Wells Fargo also intends to lift its third-quarter dividend by 11% to 50 cents per share. The Fed has stated it will not use this year’s results to update individual firms’ stress capital buffers, opting to revamp its stress-testing models before the next update in 2027, addressing industry criticisms regarding transparency. KBW analysts noted the industry is “in good shape with capital,” possessing excess capital relative to target ratios.
