The Federal Reserve has given a strong vote of confidence to the financial health of the country’s largest banks. According to the latest results from its annual stress test, twenty-two major banks in the United States are well-equipped to survive a severe economic downturn while continuing to lend and support the economy.
In this year’s scenario, which simulated a deep global recession, sharp declines in property prices, and a spike in unemployment to 10%, banks still showed resilience. Despite hypothetical losses of over $550 billion, the banks maintained capital levels more than double the regulatory minimum. On average, the common equity tier 1 capital ratio fell by just 1.8 percentage points, landing at a strong 11.6%, well above the required 4.5%.
These results matter because they influence how much capital banks must keep aside as a cushion for potential losses, known as the stress capital buffer. With the solid performance in this year’s test, banks are now expected to announce higher dividends and share buybacks, moves that reward investors and reflect confidence in their financial strength.
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Some experts believe that with this green light, banks may focus more on buying back their own shares rather than increasing dividend payouts. Over the past five quarters, many banks have already reduced their outstanding shares by an average of 3%.
The test also showed that stronger capital positions could lead to more lending. Analysts suggest that since banks have more than twice the required reserve capital, they are in a position to increase loans, especially with U.S. consumers still showing signs of financial health.
Compared to last year’s assessment, banks generally performed better. This is partly because the 2025 test was slightly less severe due to recent shifts in the broader economy. However, it still included tough assumptions like a 30% drop in commercial real estate prices and a 33% drop in home values.
Top performers in the test included JPMorgan Chase, which retained a capital ratio of 14.2%, and Charles Schwab, which posted the highest ratio at 32.7%. The lowest result came from BMO’s U.S. operations, with a still-safe 7.8%.
Federal Reserve And Stress Test Changes
This round of testing comes at a time when the Federal Reserve is also planning to make major changes to how stress tests are conducted. The current approach, introduced after the 2008 financial crisis, has faced criticism from banks for being unpredictable and hard to understand.
In response, the Fed has proposed making the test results an average of two years instead of a single snapshot. If the 2024 and 2025 results were averaged, the drop in capital would increase slightly to 2.3 percentage points. If approved, this change will come into effect in 2026. Additionally, the Fed aims to be more transparent by publishing the scenarios and models it uses and inviting public feedback.
Overall, the 2025 stress test results suggest that America’s largest banks are not only in good shape to face financial shocks but are also poised to return more capital to shareholders and potentially expand their lending activity, good news for investors and the broader economy alike.
