All Banks Pass Fed's Stress Test, Unleashing Latest Wave Of Dividends And Buybacks

In all the excitement over Micron's blowout earnings, we almost forgot that today was another Fed stress test day - which every bank passed with flying colors as usual - which in turn allowed bank to unleash a fresh flood of dividends and buybacks.

The biggest US banks boosted their dividends after passing this year’s Federal Reserve stress tests, a hurdle that even Bloomberg admits has "softened" in recent years as regulators hash out new requirements.

The results of the Federal Reserve Board's annual bank stress test confirmed that large banks are well positioned to weather a severe recession and able to continue to lend to households and businesses. Despite absorbing more than $708 billion in total loan losses under this year's hypothetical scenario, capital declined only 1.6 percentage points in aggregate, staying above minimum capital requirements.

"Today's results underscore the strength of the banking system," 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 instill greater confidence in the stress test and its results.

The Fed’s exam (the results can be found here), an offshoot of the 2008 financial crisis, showed that all of the banks examined would maintain enough capital to withstand a hypothetical economic downturn. All 32 banks tested remained above their minimum common equity tier 1 capital requirements during this year's hypothetical recession scenario, which was similar in severity to the prior test. The hypothetical scenario this year included a severe global recession with a 39 percent decline in commercial real estate prices and a 30 percent decline in house prices. The unemployment rate also increased to a peak of 10 percent, and economic output declined commensurately.

The review tends to set the tone for how aggressive banks are in returning capital to shareholders through dividends and repurchasing shares. It requires banks to consider hypothetical crisis scenarios and estimate the losses they might face based on their books of business. Yet as most banks have consistently passed the test, even those who suffered in the aftermath of the March 2023 bank crisis, the "test" has become more of a greenlight from the Fed to banks to release capital. 

Sure enough, immediately after the results, banks proceeded to announce their shareholder friendly acts: JPMorgan increased its quarterly payout to $1.65 a share from $1.50, while Goldman Sachs raised its dividend to $5 from $4.50 after the results of the Fed’s annual review were announced. JPMorgan also authorized a new $50BN share-repurchase program effective July 1. Wells Fargo raised its payout to 50 cents from 45 cents and Morgan Stanley increased its dividend to $1.15 from $1.

The nation’s six biggest banks paid out more than $140 billion in dividends and buybacks last year, surpassing a record set in 2019. The firms collectively posted their largest annual profit since 2021 on the back of record trading revenue.

Unlike other years, the 2026 results won’t impact capital requirements as the Fed continues revising the tests to make them more bank-friendly. As a result of that decision “there is no expectation that the firms delay until a particular time the public disclosure of their planned capital actions through the third quarter of 2027,” the Fed said in a statement Wednesday. 

Additionally, Bloomberg notes that this year’s test has limited impact because the Fed voted in February to freeze the current stress capital buffer requirements until 2027 as it continues to overhaul the annual exam. Last year, those requirements fell for many banks as the test was less stringent than in past years.