Fed stress tests show 32 banks resilient, undercutting Warsh put hopes

The Fed's clean stress test results give Kevin Warsh the cover he needs to let markets fall without a rescue.

The Federal Reserve's annual stress tests confirmed all 32 large US banks could withstand a 39 percent commercial real estate crash and 58 percent equity market collapse, removing the systemic-risk rationale that has historically triggered central bank intervention.

"The clean results remove the last plausible argument for a Fed put," said Krishna Guha, head of global policy and central bank strategy at Evercore ISI. "Warsh now has a data-backed reason to stay on the sidelines."

The severely adverse scenario also assumed a 30 percent drop in house prices and the VIX spiking to 72, near its March 2020 peak of 82. Despite the extreme assumptions, all 32 institutions maintained capital above regulatory minimums. The stress capital buffer requirements remain frozen at 2025 levels through at least 2027, meaning even weak performers face no immediate capital surcharge. Bank of America, JPMorgan Chase and Wells Fargo already operate at the 2.5 percent minimum SCB.

The confluence of clean stress tests, a 7.9 percent chip index rout on June 23 and a 10 percent KOSPI crash in South Korea creates a defining moment for the Warsh-era Fed. If the banking system is resilient to a near-worst-case scenario, asset price declines remain an asset price problem — not a financial stability problem requiring Fed intervention.

A Clean Bill of Health With No Regulatory Teeth

The 2026 stress tests carry less regulatory weight than prior years. The Fed froze stress capital buffer requirements in February and will not update them until at least 2027 as it reviews its testing models for transparency. The central bank solicited public feedback on scenario design in late 2025 as part of a broader push to make the process less opaque.

The results nonetheless provide a snapshot of how the largest US lenders would fare in a severe downturn. Last year, all major banks passed and the six largest saw their stocks rise more than 25 percent. This year, institutions with heavy commercial real estate exposure face the most scrutiny given the 39 percent CRE price decline in the scenario.

Notably absent from the test: any explicit modeling of crypto or digital asset exposures. Multiple large banks now hold Bitcoin ETF positions, offer custody services and maintain lending arrangements with digital asset firms, but the Fed has not yet developed a uniform methodology for stress-testing these exposures.

The Warsh Doctrine Takes Shape

The stress test results arrive one week after Warsh chaired his first Federal Open Market Committee meeting on June 17. At that meeting, the FOMC's dot plot removed the last remaining 25-basis-point rate cut projected for 2026, and at least three voting members predicted a rate increase this year. Warsh likely did not submit his own rate projections, according to economists at Goldman Sachs and Bank of America, consistent with his long-held skepticism of forward guidance.

The fed funds rate remains at 5.25 percent to 5.50 percent, unchanged since the last 25-basis-point hike in July 2023. With CPI at 4.2 percent and PPI at 6.5 percent, rate cuts are off the table in arithmetic terms. Warsh has also suggested reducing the number of FOMC meetings from eight to four per year and indicated that press conferences should not automatically follow every meeting.

"The industry is in good shape with capital, as all the names have excess capital relative to the implied pro forma target capital ratios," KBW analysts wrote in a note previewing the stress tests. "The industry continues to be in a position to take advantage of de-regulatory momentum."

A survey of 34 former Fed officials and staff conducted before the June FOMC meeting found 17 believed a 2026 rate increase could be appropriate, while 14 disagreed — a deeply divided picture that Warsh must navigate.

The next FOMC meeting is expected in late July. If the July statement begins discussing rate increases rather than cuts, the last vestiges of the "Warsh put" narrative will be extinguished — not because Warsh acted aggressively, but because the market's expectation of a rescue was never grounded in reality.

This article is for informational purposes only and does not constitute investment advice.