The Federal Reserve reports that all 31 banks passed the annual stress test under a severe hypothetical economic downturn.

• The U.S.'s largest banks can withstand a severe recession, according to the Federal Reserve.
• The Fed announced that all 31 banks passed this year's regulatory test, demonstrating the ability to withstand losses while maintaining sufficient capital levels.
• This year's stress test included major financial institutions such as JPMorgan Chase and Goldman Sachs, credit card companies like American Express, and regional lenders such as Truist.

The Federal Reserve announced on Wednesday that major U.S. banks can withstand a severe recession while still providing loans to consumers and businesses.

The Fed announced that all 31 banks passed this year's regulatory test, demonstrating the ability to withstand losses while maintaining sufficient capital levels.

Assuming a stress test, unemployment increases to 10%, commercial real estate values decrease by 40%, and housing prices drop by 36%.

"According to Michael Barr, the Fed's vice chair for supervision, this year's results demonstrate that even under stressful conditions, large banks would suffer only $685 billion in total hypothetical losses, while still maintaining significantly more capital than their minimum common equity requirements. This positive outcome highlights the value of the extra capital that banks have accumulated in recent years."

The Fed's stress test determines the amount of capital banks must hold for bad loans and influences the amount of share repurchases and dividends paid out. This year's test included major banks like JPMorgan Chase, credit card companies like Visa, and regional lenders like BBVA.

Despite the 2023 test having the same assumptions as this year's exercise, the groups' aggregate capital levels dropped by 2.8 percentage points, which was more severe than the decline seen in the previous year.

The Fed reports that the industry is holding more consumer credit card loans and corporate bonds that have been downgraded, resulting in squeezed lending margins compared to last year.

"Although banks are equipped to handle the recession we simulated, the stress test revealed areas of concern. The financial system and its risks are constantly changing, and we discovered during the Great Recession that ignoring shifting risks can have severe consequences."

The Fed conducted an "exploratory analysis" of funding stresses and a trading meltdown affecting only the eight largest banks.

Despite a sudden surge in the cost of deposits and a recession, the companies managed to avoid disaster. In the event of the collapse of five large hedge funds, the big banks would lose between $70 billion and $85 billion.

The Fed stated that hedge funds pose a significant risk to banks, but that they are capable of withstanding various types of trading book shocks as evidenced by the results.

Banks are expected to begin announcing their latest share repurchase plans on Friday.