RPT-BREAKINGVIEWS-Bank stress tests get less stressful, more crucial

By Stephen Gandel

NEW YORK, June 30 (Reuters Breakingviews) - Watchdogs are grading Wall Street on an ever-easier curve. Nearly every year since the 2008 financial crisis, the U.S. Federal Reserve has evaluated how the nation’s biggest banks would fare in another downturn. On Friday, the central bank once again handed out only passing grades, marking nine years since any of the test takers – this year, 22 qualifying banks accounting for $10 trillion in assets – have failed. Thanks to a threatened lawsuit and the Trump administration, a passing grade may become even easier, just as rigor becomes more important.

The Fed’s annual check-ups were a crucial part of its response to the deepest economic calamity in a generation. In 2009, they helped bolster confidence in the weakened banking system. Legislators subsequently enshrined them as a regular exercise in 2010’s Dodd-Frank reforms.

These exercises help determine how much loss-absorbing capital banks must hold. While rarely outright flunking lenders, the Fed has regularly changed up testing criteria, a nuisance for firms unsure of whether they had enough leeway to, say, return cash to shareholders.

In December, regulators agreed to make their analysis more transparent and consistent to allay an industry lawsuit. It was probably inevitable. Michelle Bowman, now the Fed’s bank supervision chief, and Jonathan Gould, Trump’s nominee for comptroller of the currency, are stress-test skeptics.

As the administration picks apart the post-crisis regulatory framework, though, the much-hated stress test’s import grows. An interlocking set of rules all interact to restrain risky behavior. As other safeguards are trimmed, the stress capital buffer, as it is known, becomes more of a binding constraint.

Take the example of JPMorgan. Under this year’s stress-test results – accounting for both the minimum capital ratio it must always hold, as well as how badly it might be hit by a crisis – the bank led by Jamie Dimon had as much as $45 billion of capital in excess of requirements, according to Reuters Breakingviews calculations.

This only matters so much for now. Another regulation – the supplementary leverage ratio – means JPMorgan could only lower its capital reserves by a little under $20 billion. Recently proposed tweaks to the SLR, though, would lift that to nearly $60 billion, potentially making the stress buffer the operative limit.

Given Wall Street’s string of recent victories, it’s clear that the post-crisis regulatory era is ending. Even if sometimes too restrictive, it worked: no large bank has failed in the past 15 years. If there was a shortcoming, it was the overwhelming focus on big institutions, as shown by 2023’s regional banking crisis. A new regulatory regime might make sense for a changed financial system. Right now, though, it’s mostly an exercise of loosening safeguards.

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CONTEXT NEWS

The U.S. Federal Reserve released the results of its annual stress test of the nation’s largest banks on Friday, June 27. For 2025, the central bank tested lenders’ ability to withstand a hypothetical severe recession in which unemployment rises to 10%, house prices fall 30%, and the stock market loses half its value. Each of the 22 analyzed banks passed.