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Low Stress

Published on June 25, 2026

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Bill Hebel

Brian Herlihy

The Fed Stress Test was released last night and as expected was a low stress event for the banks as the Fed had already announced that the Stress Capital Buffer (SCB) would remain at 2.5% as they pondered new input from the banks on the process and the modeling.

This year was also a bit of apples and oranges as those banks who were on the every other year schedule and didn’t submit last year played some catch up while those who did were by in large already at the 2.5% SCB. As such, we think there will likely be little that “surprises” investors in the results.

The larger takeaway here is that the system as a whole continues to be well capitalized and had its smallest drawdown in CET1 in the Severely Adverse Scenario in the last 7 years at 1.6%, eclipsing last year’s 1.8% which was a 100bps improvement from the year before.

_{Source: Federal Reserve Annual Stress Test}

From a scenario standpoint, the Fed made the test incrementally harder on a YoY basis as it pertained to commercial real estate (CRE), BBB spreads, and a drawdown in equity prices offset by less GDP drawdown as well as slightly less stress in residential real estate. The net effect was the 20bp improvement in the CET1 you see above.

_{Source: Federal Reserve Annual Stress Test}

Results:

Normally we would go through a “winners” and “losers” exercise, but it’s a little harder this year with most all of last year’s participants already at the 2.5% SCB coming into this year’s test while those who didn’t participate are playing a little catch up. Those who didn’t (highlighted in grey) are where we saw the largest incremental improvement with CFG coming down an estimated 2% from their 4.5% SCB to the 2.5% level. FITB & KEY showed 0.7% improvement on our analysis and last year’s participants (MTB & USB) improved an estimated 0.2% and 0.1% to complete the remainder of the journey to 2.5%.

In terms of capital actions taken post close in our coverage, we saw the following:
- WFC – raises quarterly dividend ~11% to $0.50 from $0.45
- USB – raises quarterly dividend ~3.8% to $0.54 from $0.52

In sum, a benign outcome which we believe was largely expected given the static SCB this year. Going forward, clarity around the Fed’s models and the new capital rules will be key to the future industry stress testing which Vice Chair Bowman has championed.

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Coverage Universe	Percent
Sector Outperform	31.25
Sector Perform	50
Sector Underperform	18.75

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