At the end of June, the Federal Reserve released the results of the 2025 Dodd Frank Act Stress Test (DFAST). This is the annual test where banks send their balance sheets to the Fed which then works their scenarios and models to predict how the banks will fare through some severely adverse scenarios and specifically how much capital the banks should keep in order to be able to withstand such dire times.
This year 22 banks participated in the fire drill, and we are happy to report they all did reasonably well.
Nearly 60% of the banks have capital ratios that are currently and also projected to be over the minimum requirement in Q1 of 2027. Another 23% are currently over and predicted to be just at the minimum requirement by 2027. The rest—17%—are currently holding capital below the minimum requirement but are projected to be over by the first quarter of 2027.
- The Fed highlights four reasons for this reassuring result:
- The severely adverse scenario was less severely adverse than the year before
- The Fed no longer considers the banks’ private equity exposures sensitive to market shocks
- The Fed’s models assume that when banks do better profit-wise, they put aside more to cover losses
When the snapshot of the banks’ positions was taken in October 2024, there was some atypical trading behavior on some banks’ side that led to fewer losses in the test
I will leave it up to you to decide if any of these reasons indicate that Team Bank has changed its stance on the minimum required capital ratio being too high, and I can give you a clue: it has not.
Quite the contrary. As we reported a few months back, Goldman Sachs won a complaint about the Fed being too strict, opaque, and erratic when setting the minimum capital requirement. In addition to Goldman having their requirement reduced, the Fed also announced changes to DFAST that should bring more transparency and less volatility to the capital ratios. This renovation is now underway.
And tipping the scales further in favor of Team Bank: on the same day as the DFAST results were published, Team Regulator also requested comments from Team Bank on whether they would like to see the enhanced supplementary leverage ratio modified, i.e., lowered.
The enhanced supplementary leverage ratio is an extra safety layer on the total capital ratio for the biggest banks that was put in place after the Global Financial Crisis in 2008.
It is far from The Risk Report to throw around conspiratorial hints, but it’s fair to say that Team Regulator would have had a harder time suggesting a lower ratio if the DFAST results had shown the banks were undercapitalized.
Alas, an adequate chunk of capital on the balance sheet does not mean there is no risk or losses to come. Going through the individual bank results in the stress test, it is not surprising that a scenario with low economic growth, falling real estate and stock prices, and high unemployment will hit the banks on their commercial and industrial loans as well as their credit card portfolios.
We can thus conclude that a severely adverse scenario will have severely adverse consequences for businesses, consumers, and those who provide them with credit, even if the credit providers are reasonably prepared for that.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.