Federal Reserve 2026 stress test: 32 large US banks absorb $708 billion in losses

The Federal Reserve said on Wednesday that 32 large US banks had sufficient capital to absorb nearly $708 billion in projected losses under its 2026 Dodd-Frank Act stress test. Aggregate common equity Tier 1 capital fell from 12.8% to a projected minimum of 11.2% under the severely adverse scenario.

The results, published on 24 June, will not affect large banks' capital requirements: as previously announced, current stress capital buffer requirements stay in place until 2027, when the test will be run with loss-estimating models that take public feedback into account.

CREDIT CARDS DRIVE LOSSES

Credit card portfolios were the single largest source of projected losses, contributing roughly $200 billion of the total. Commercial and industrial loans generated a further $160 billion, and commercial real estate about $75 billion.

The Fed said the hypothetical scenario, similar in severity to the prior test, included a 39% decline in commercial real estate prices, a 30% decline in house prices and unemployment peaking at 10%.

The Fed said aggregate and individual bank post-stress CET1 ratios remained above required minimum levels throughout the projection horizon, with the aggregate ratio recovering to 12.7% by its end. In a normal cycle this drawdown would feed into stress capital buffer settings, but this year's results leave requirements unchanged.

SCB REQUIREMENTS HELD TO 2027

The decision to maintain stress capital buffer requirements until 2027 means that the SCBs implied by the 2026 exercise do not take effect. The Fed published firm-level results and each bank's capital requirements the same day, and several banks announced dividend increases and buybacks that evening.

Each large bank's CET1 requirement combines the 4.5% minimum, its SCB requirement (at least 2.5%) and, where applicable, a surcharge for global systemically important banks.

The full DFAST results document and press release are available on the Federal Reserve Board's website, including firm-level projections and details of the severely adverse scenario used in the exercise.

The $708 billion total comprises $625 billion of loan losses plus trading and counterparty, securities and other losses, with roughly $200 billion in credit card losses and $160 billion in commercial and industrial loan losses the two largest components. The 2027 test will be run with loss-estimating models that take public feedback into consideration.

The Fed said the 1.6 percentage point decline in aggregate capital reflected higher loan losses and lower projected unrealised securities gains, more than offset by higher projected interest income.

Several of the tested banks announced dividend and buyback plans on the evening of the release.