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U.S. Bank Shares Surge as Federal Reserve Unveils Softer Stress Test Parameters
During a recent event at the Milken Institute Global Conference in Beverly Hills, California, Jane Fraser, the CEO of Citigroup, made headlines as bank stocks experienced a notable uptick. This surge was prompted by the Federal Reserve’s release of its annual stress test parameters for 2025, which indicated potentially smaller economic shocks compared to previous years.
The 2025 stress test scenarios, while still incorporating significant challenges—such as an anticipated spike in unemployment reaching 10% and a 33% dip in housing prices—projected softer impacts on the economy. According to Jason Goldberg of Barclays, the scenarios showcase smaller fluctuations in unemployment rates and less severe declines in both stock and real estate markets than those outlined in earlier stress tests. In his recent report, titled “2025 Stress Test: Scenarios Easier than Past Two Years,” he emphasized this notable shift in expectations.
In a statement issued after market close on Wednesday, the Federal Reserve also announced its plans to enhance the transparency of stress test results and mitigate the fluctuations in outcomes observed in prior exams. This represents a significant step towards refining the methodology employed in these annual evaluations.
As the news broke, shares of Citigroup experienced a 2.9% increase during midday trading. Other major financial institutions, including Goldman Sachs, Morgan Stanley, and Bank of America, all saw stock prices rise by at least 1.5%. Overall, larger banks outperformed their smaller counterparts, with the KBW Bank Index rising by 1.2%, in contrast to the S&P Regional Banking ETF, which gained only 0.9%.
The adjustment to the stress test parameters has been interpreted by many on Wall Street as indicative of a potentially more favorable regulatory landscape for large U.S. banks under the current administration. Since the financial turmoil of 2008, significant banks have been subjected to stringent annual assessments to evaluate their resilience in the face of severe economic downturns, ensuring their capacity to continue lending to both consumers and businesses.
Critics from within the banking sector have long argued that these annual stress tests lack clarity and are inconsistently applied, leading to legal action from industry trade groups against the Federal Reserve in December. With the 2025 test designed to be both less daunting and more predictable, there is speculation that banks may reduce their capital reserves later in the year, as indicated by Bank of America analyst Ebrahim Poonawala.
Poonawala noted, “The 2025 stress test scenario, broadly better vs last year, increases our confidence that banks should begin to see relief on regulatory capital requirements, given our expectations for a shift to a balanced, transparent, and more predictable regulatory regime.” This perspective suggests a potential shift in the regulatory landscape that could benefit the banking sector in the near future.
CNBC’s Michael Bloom contributed to this report.
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