Key facts
- The Federal Reserve will release its annual bank stress test results on Wednesday at 4:00 p.m. ET.
- This year's stress tests will not change capital levels for the tested banks.
- The tests assess if banks can remain above a 4.5% minimum capital ratio during a hypothetical severe economic downturn.
- The current stress test scenario includes a severe global recession and heightened stress in commercial and residential real estate markets.
- The Fed is reworking the stress test process in response to industry criticisms regarding opacity and subjectivity.
- Banks sued the Fed in 2024 seeking changes to the stress test models and scenarios.
The U.S. Federal Reserve is set to release the results of its annual bank stress tests on Wednesday. These tests, established after the 2007-2009 financial crisis, evaluate whether large banks can withstand a severe economic downturn. Banks are assessed on whether they would remain above a minimum capital ratio of 4.5% of their assets during a hypothetical recession.
This year's exercise applies to 32 banks and includes a scenario of a severe global recession with heightened stress in commercial and residential real estate markets. Banks with significant trading operations are also tested against a global market shock and the default of their largest counterparty.
However, unlike in previous years, the results of this year's tests will not lead to changes in capital levels for the banks. The Fed announced in February that it would not update the 'stress capital buffers'—an additional layer of capital determined by hypothetical losses—following this year's exam, and will instead maintain existing buffers until at least 2026. This decision comes as the Fed is reworking the stress test methodology in response to criticisms from the banking industry, which has long complained about the process being opaque and subjective.
Banks have actively pushed for reforms, with some even suing the Fed in 2024 to compel changes. The proposed revisions aim to increase transparency by allowing banks to review and provide feedback on the confidential models and annual scenarios used in the tests. Fed Vice Chair for Supervision Michelle Bowman indicated that freezing capital levels this year will allow regulators to incorporate feedback and address any deficiencies in the process.