The Fed's Stress Test Skips $2.5 Trillion in Bank Exposure
All Clear, Wrong Question
The Federal Reserve ran its annual stress test on June 24, pushing 32 large US banks through a hypothetical recession: unemployment at 10 percent, commercial property prices down 39 percent, home prices down 30 percent. This is a paper exercise, not a real downturn. The Fed builds a fictional bad year, runs each bank's loan book through it on a computer, and checks whether the bank would still have enough capital left to keep operating. Every one of the 32 banks stayed above its minimum capital requirement. That means none of them would have needed a bailout or a fire sale under that scenario, and capital levels fell just 6 percentage points. That is a small dent for a hypothetical recession this severe, and it is why the market treated the result as a strong one. The result matters because it is the Fed's signal that a bank has spare capital, and spare capital is what regulators require before they let a bank hand cash back to shareholders. So the banks moved fast. JPMorgan raised its dividend 10 percent and opened a $50 billion buyback, meaning it will spend that much repurchasing its own shares, a move that boosts the stock price and rewards existing shareholders. Goldman Sachs lifted its payout 11 percent. Morgan Stanley raised its dividend 15 percent and launched its own $20 billion buyback. All of this happened within a day of the result. The Fed also froze the capital buffer banks must hold until 2027, so lenders will not need to set aside more cushion in the meantime. Here is the catch: the test asked whether banks survive a normal recession. The Fed's own staff spent the same year asking a different question: what happens when the shadow lender next to a bank stops paying.
The Test That Wasn't Run
Start with the scale of what got left out. Private credit, lending done by investment funds rather than banks, is now a $1.5 to $2 trillion market, according to the Financial Stability Board, the international group of central banks and regulators that monitors risks to the whole financial system. Banks do not just watch this market from the sidelines. They lend into it, through credit lines, warehouse facilities, and standby commitments, all ways a bank can end up on the hook to a fund without that debt ever showing up as a normal loan on its books. Add it up and banks have promised to hand over $2.5 trillion more if these funds come calling. Forbes contributor Mayra Rodriguez Valladares, a banking capital specialist who flagged the gap, points out that the stress test framework was built before private credit reached this size. It still does not model a scenario where a wave of these funds face redemption pressure, meaning investors all try to pull their money out at once, and lean on their bank credit lines simultaneously to cover the gap. That scenario matters because a fund under redemption pressure does not fail quietly. It draws down every credit line it can, and those draws land on bank balance sheets all at once. That is exactly the kind of shock the June 24 test never simulated. It is also not hypothetical to the Fed itself: Fortune reported in April that the Fed had separately begun asking major banks for detail on how much debt private-credit funds owe them, after retail-facing credit funds hit redemption trouble. The Treasury asked insurers the same question about their own exposure. Neither inquiry has a publication date attached.
A board citing the June 24 result on nonbank counterparty risk is citing the wrong document. The stress test measured recession resilience. The Fed's separate inquiry is measuring $2.5 trillion in bank exposure to private-credit funds, and it has not been published as a scenario with a number attached. The 32 banks passed on June 24. The private-credit question has no release date yet.