US banks: No stress here

Last week, the US Federal Reserve (Fed) published the results of its 2026 Dodd-Frank Act Stress Test, with all 32 large banks – including a few subsidiaries of European lenders – remaining above their minimum capital requirements under a severely adverse scenario. The common equity tier 1 (CET1) drawdown of 1.6% in a severe case has been the lowest we have seen in recent years. 

Despite years of improvements in capital positions and risk profiles, as well as rather non-headline-grabbing outcomes of this exercise in the recent past, the Fed’s stress tests continue to be closely monitored by the market as they are linked to the annual capital planning of US banks.

There are a few key takeaways:

First, while major headlines around European or Bank of England (BoE) stress tests have faded due to sustained resilience of the region’s banks, the Fed’s stress tests tend to attract closer attention. This is because the Fed’s results historically feed very closely into banks’ annual capital planning through the annual Stress Capital Buffer (SCB) framework. 

This year is slightly different, with the Fed maintaining current SCB requirements until 2027 while proposed changes to the stress testing framework are finalised. Waiting until 2027 gives the Fed time to review public feedback on the stress test models and make any necessary improvements before using them to set new capital requirements. 

Even so, the exercise remains important, as it assesses the resilience of large banks. By estimating loan losses, revenues and capital levels under a severe recession scenario, it provides a useful read-across to each bank’s lending capacity, improving transparency around sector resilience and supporting broader market confidence in the banking system.

The Fed’s stress test assumptions are similar to those from the BoE and are based on a severe global recession scenario. This includes heightened stress across commercial and residential real estate markets, material widening in corporate bond spreads and a sharp equity market shock. 

Under this adverse scenario, the CET1 ratio of banks in the sample falls from 12.8% to 11.2%, before recovering to 12.7% by the end of the nine-quarter projection horizon. All large banks were projected to remain above their individual minimum requirements throughout the test. 

As shown in Exhibit 1, this year’s 1.6% decline in CET1 is an improvement on last year’s 1.8% fall and remains better than the 2020 result. However, the improvement in the ratio does not solely reflect the improvement in banks’ capital strength. Rather, it is driven by changes in the stress test assumptions, including a smaller drop in interest rates, which supports banks’ earnings and has also had a positive impact on their expected capital levels.

It is also worth noting that the 20 basis point (bp) improvement in CET1 impact was mainly driven by stronger-than-projected net interest income, which more than offset higher loan losses and a smaller available-for-sale (AFS) securities benefit, as the scenario assumed a smaller decline in long-term rates.

In addition, over the projection horizon, aggregate losses on loans and other positions totalled $708bn. Loans accounted for 89% of these projected losses, split almost evenly between commercial and consumer loans, with a loss rate of 6.9% of gross lending compared to 6.6% in the 2025 test. The largest losses in both years came from credit cards, with a 17.1% loss rate in 2026, followed by commercial and industrial loans at 9.0%, with both segments contributing to the year-on-year increase. 

Significantly, there is limited stress from AFS assets (which was the weakness at Silicon Valley Bank), though this is most likely a function of the stress test assumptions that anticipate a gradual reduction in interest rates. 

Banks’ revenue generation also remained robust under the stress scenario, with pre-provision net revenue (PPNR) providing an important first line of defence. Aggregate PPNR was projected at $719bn, up 53% from $469bn a year earlier on a headline basis, providing a stronger buffer to absorb projected losses.

We also note the performance of foreign banks with sizeable US subsidiaries, particularly the European names. These entities have faced greater scrutiny in previous Fed stress tests, mainly due to qualitative weaknesses in capital planning. Against that backdrop, the 2026 results are encouraging, as the US subsidiaries of European banks remained above minimum capital requirements under the severely adverse scenario. 

For credit investors, we see these results as reassuring. Large US banks continue to operate with substantial capital buffers, strong revenue generation and meaningful loss-absorption capacity, even under a severe macroeconomic shock. 

This structural strength matters at a time when regulators are considering ways to recalibrate parts of the post-crisis capital framework; the direction of travel may be more accommodative, but the starting point for bank balance sheets remains very strong. These results reinforce our positive fundamental view on bank credit, with robust profitability and capital buffers continuing to support investor demand, though tight spreads do suggest much of this resilience is already reflected in valuations.