Wall Street’s biggest banks would survive a severe recession, the Fed’s ‘stress tests’ show

The 23 largest banks in the United States passed the Federal Reserve’s so-called stress tests this year, a sign that the nation’s banking system remains resilient despite the recent crisis that led to the failure of Silicon Valley Bank, Signature Bank and First Republic Bank.

The Fed’s report issued on Wednesday did show some relative weakness among the midsize banks and “super regional” banks, with some getting a passing grade with a smaller cushion than usual. Those results could raise eyebrows among investors and policymakers.

Fed policymakers also hinted that they could make the tests harder in future iterations, due to the banking crisis earlier this year.

“We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses,” said Michael Barr, the Fed’s vice-chair for supervision, in a statement.

The “stress tests” have become an annual report card for the nation’s financial system since being implemented after the Great Recession and 2008 financial crisis. The tests vary from year to year, but generally involve the Fed testing to see how steep the losses in the banking industry would be if unemployment were to skyrocket and economic activity were to severely contract.

The Fed has also used current events to determine their scenarios. For example, the central bank has previously tested banks against the possibility of a double-dip recession caused by the coronavirus pandemic.