All 32 of the nation’s largest banks passed the Federal Reserve’s annual stress test released on June 24, demonstrating their ability to withstand a severe economic downturn and maintain adequate capital levels. The regulatory exercise simulates a hypothetical adverse scenario to evaluate whether these systemically important institutions would have sufficient financial buffers to absorb significant losses while continuing to lend.

Under the 2026 test scenario, the U.S. economy contracts by 4.6%, unemployment rises sharply from 5.5% to 10%, housing prices decline by roughly 30%, and the stock market falls by 58%. Banks collectively face projected loan losses totaling $708 billion, with credit card, commercial and industrial, and commercial real estate sectors contributing major portions of the losses. Despite these challenges, the banks’ aggregate common equity tier 1 capital ratio fell modestly from 12.8% to 11.2%, remaining well above the regulatory minimum of 4.5% plus additional buffers that vary by institution.

The stress test applies primarily to the largest institutions deemed systemically important, whose failure could disrupt the broader financial system. Banks that had underperformed in prior exercises faced restrictions on dividends or share repurchases, although this year’s results were generally positive. Several large banks announced plans to increase dividends and expand stock buybacks following the release. JPMorgan Chase, for example, said it would raise its quarterly dividend to $1.65 per share from $1.50 and authorized an additional $50 billion share repurchase program. Goldman Sachs, Morgan Stanley, State Street, and Wells Fargo also declared dividend increases ranging from 10% to 25%, with share buybacks reauthorized at several firms.

The Federal Reserve noted that capital ratios declined due to loan losses and reduced unrealized gains, partially offset by higher interest income resulting from modest declines in interest rates assumed in the scenario. Results varied among banks, with First Citizens holding the lowest stress capital ratio at 6.7%, while Charles Schwab reported the highest at 32.2%.

Compared with previous years, this year’s stress test results were less severe. The Fed indicated it would not update individual firms’ stress capital buffer requirements based on the 2026 outcomes. Instead, it plans to revise its stress-testing models and procedures over the coming year, incorporating industry feedback and addressing longstanding criticisms regarding the opacity and subjectivity of the process. The next update of the stress capital buffer is expected after the 2027 test.

Banking analysts highlighted that the industry maintains robust capital levels, exceeding regulatory requirements and positioned to benefit from potential deregulation. Proposed changes to capital regulations, including updates to Basel risk-based capital standards, remain under consideration and could enable banks to release additional capital for shareholder distributions or investment. Overall, the results underscore the banking sector’s resilience to a severe hypothetical economic downturn as assessed by the Federal Reserve.