By Samantha Barnes, International Banker
On June 24, the United States’ Federal Reserve (the Fed) announced the results of its annual Comprehensive Capital Analysis and Review (CCAR), which confirmed that large US banks are well positioned to weather a severe recession and could continue to lend to households and businesses. The stress test involved a combination of severely adverse operating scenarios, including:
- US unemployment rising from 4.5 percent to 10 percent;
- Real gross domestic product (GDP) falling by 4.6 percent from peak to trough;
- House prices and commercial-property prices declining by 30 percent and 39 percent, respectively;
- Equity prices losing approximately 58 percent of their value and widening corporate-bond spreads placing additional pressure on business borrowers and banks’ trading portfolios;
- A 3.6-percentage-point decline in the 3-month Treasury rate to 0.1 percent, and a 1.8 percentage point fall in the 10-year yield to 2.3 percent.
Compared with the 2025 exercise, this recession was considerably shallower—last year’s scenario included a hefty 7.8-percent fall in real GDP—while the declines in commercial-property and equity prices were more pronounced.
The Fed subjected 32 large US banks to this stress environment and found that the lenders would absorb almost $708 billion in losses.
The Fed subjected 32 large US banks to this stress environment and found that the lenders would absorb almost $708 billion in losses. Their aggregate Common Equity Tier 1 (CET1) capital ratio—that is, the highest-quality capital (such as ordinary shares and retained earnings) divided by the total combined risk-weighted assets (RWAs)—would fall by only 1.6 percentage points, from 12.8 percent to a low of 11.2 percent, before recovering to 12.7 percent by the end of the projected nine-quarter exercise. This was the smallest aggregate capital decline reported in any of the Fed’s annual tests since 2020, although changes in the participating banks prevent a uniform like-for-like comparison.
Among the most positively meaningful results was that every bank assessed remained above the 4.5-percent minimum CET1 ratio throughout the hypothetical downturn, indicating that they were all equipped with a sufficiently strong and readily available cushion against potentially substantial losses. Preserving this capital enables banks to continue recognising bad debts without becoming insolvent or immediately cutting lending simply to defend their balance sheets; as such, the stress-test results provided robust evidence that the largest American banks would remain solvent through a pronounced recession.
The limited decline in capital also owes much to solid earnings. The Fed has projected that the banks would generate $719 billion of pre-provision net revenue—income before provisions for credit losses—during the nine quarters, including $1.27 trillion of net interest income. Recent loan growth and the higher path for interest rates than in previous tests increased the income available to absorb losses, thereby more than offsetting larger loan losses and smaller projected gains on available-for-sale securities.
Current banking data supports this generally favourable picture without removing those pressure points. FDIC (Federal Deposit Insurance Corporation)-insured institutions earned $80.5 billion in the first quarter of 2026, an increase of $10.1 billion (14.3 percent) from a year earlier, while their return on assets (ROAs) rose by 10 basis points year-on-year to 1.26 percent. The Federal Reserve reported that the overall loan-delinquency rate ended 2025 at 1.6 percent, well below its long-run average of approximately 3 percent.
“Today’s results underscore the strength of the banking system,” the Fed’s vice chair for supervision, Michelle W. Bowman, said. “As we work to increase the transparency and accountability of the stress test, public feedback will help us continue to improve and instil greater confidence in the stress test and its results.”
The banks that underwent the tests have also been decidedly upbeat about the results, with Goldman Sachs taking little time after their release to announce its plans to increase its common dividend by 11 percent. “Today’s announcement reflects the continued strength of our earnings and capital position, and our commitment to delivering sustainable, long-term returns to shareholders,” the bank’s chairman and chief executive officer, David Solomon, stated. “Our planned dividend increase reflects the strength of our franchise, our earnings power, and our confidence in our ability to support clients, invest for the long term, and deliver sustainable returns to shareholders.”
Nevertheless, the $708 billion in combined losses that the stress test confirmed would be incurred by the banks is not insignificant. According to the test results, such a recessionary scenario would cause particularly pronounced damage in the form of:
- $203 billion in credit-card losses, producing a portfolio loss rate of 17.1 percent,
- $158.2 billion in commercial and industrial loan losses, with a 9-percent loss rate,
- $76.5 billion in commercial real estate (CRE) losses at a loss rate of 8.8 percent.
Furthermore, first-lien residential mortgages would generate just $22.5 billion of losses at a 1.5-percent loss rate, thereby indicating that unsecured consumer credit, corporate lending and commercial property present much greater risks than conventional home loans. With the Office of the Comptroller of the Currency (OCC) continuing to identify refinancing risks in parts of commercial real estate and modest increases in past-due loans within some consumer portfolios, the stress test’s largest projected losses were identified in areas in which deterioration was already visible, despite asset quality being broadly favourable.
Aggregate strength also conceals the considerable differences between banks. First Citizens Bank, for example, entered the test with a CET1 ratio of 11.2 percent and reached a stressed minimum of 6.7 percent, the lowest of the 32 institutions. Ally Financial declined from 10.2 percent to 7.8 percent, while HSBC North America fell from 11.3 percent to 8.1 percent. Deutsche Bank USA (DB USA) experienced a much larger 8.2-percentage point decline, but its starting ratio of 22.6 percent left it with a 14.4-percent minimum.
Notable for its acquisition of Silicon Valley Bank (SVB) after SVB failed in 2023, First Citizens’ 6.7-percent stressed minimum remained above the 4.5-percent hard floor; nonetheless, it still fell below the 7-percent total CET1 requirement published for the bank in June, which included its 2.5-percent stress capital buffer (SCB). As such, depleting this buffer during a severe downturn would likely restrict the bank’s capital distributions rather than signal immediate failure.
The coverage of the test, which was restricted to 32 large banks with more than $100 billion in assets, also reflects its limitations for reaching firm conclusions about the overall state of US banking. Clearly, those participating banks hold a sizeable share of US banking assets, such that their resilience is essential to maintaining financial stability. But with the FDIC identifying 4,278 insured US institutions in total by the end of the first quarter, the health of smaller and regional banks remains untested. Such banks often carry more concentrated exposures to particular property markets, business sectors or depositor groups, while their funding bases are typically less diversified.
Liquidity represents another crucial issue, with uninsured deposits reaching $7.61 trillion at the end of 2025, 7.7 percent higher than a year earlier.
Liquidity represents another crucial issue, with uninsured deposits reaching $7.61 trillion at the end of 2025, 7.7 percent higher than a year earlier. Their share of bank assets, however, remained comfortably below their 2023 peak. Banks’ securities are now worth a combined $300 billion or so less than their book value, down from approximately $700 billion in late 2022, with some securities maturing, bond prices recovering, and banks adjusting their portfolios.
Whilst having declined, therefore, those unrealised losses have not disappeared. Large banks may generally hold strong liquidity buffers, but forced bond sales during a rapid deposit run could transform manageable paper losses into sizeable systemic losses that damage capital and confidence, especially if banks are forced to sell their securities when current prices are substantially below their balance-sheet values.
Indeed, the 2023 failures demonstrated that a bank can appear adequately capitalised and still collapse when uninsured depositors withdraw money faster than assets can be sold or pledged for cash. While the 2026 scenario assumed that interest rates would fall sharply as the recession developed, it offered less information about the potential impact of a downturn accompanied by persistent inflation, elevated funding costs and/or renewed losses on long-duration securities.
The exercise also concentrated on the immediate effects of the recession on individual balance sheets. Banks’ credit commitments to non-bank financial institutions (NBFIs) increased by 14 percent during 2025 to reach $2.6 trillion, led by private equity, business development and private-credit vehicles. Simultaneous credit-line drawings, forced asset sales and losses spread between banks and non-banks could amplify an initial shock in ways the headline CET1 result does not capture. Fed Governor Lisa Cook described supervisory stress tests as “excellent at addressing the ‘known unknowns’ we face”. Their precision becomes less useful, however, should the next crisis unleash a mechanism outside the test-environment scenario.