Bank Stress Tests Are Coming in Late June. These Big Banks Could Reward Shareholders Next.

Every year in late June, the largest U.S. banks get the results of their stress tests, which are designed by the Federal Reserve to determine the capital strength of a bank in the event of a recession or some other economic shock or stress.

The tests were put in place via the Dodd-Frank bill following the 2007-2009 financial crisis to make sure that banks could navigate a similar economic meltdown.

The results of the tests determine how much of a capital buffer that banks should build into their finances -- called the stress capital buffer.

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To summarize, Dodd-Frank established a minimum amount of capital that large banks must have through the Common Equity Tier 1, or CET1, ratio. If the bank loses a lot of capital during the annual hypothetical stress tests, then the Fed imposes a higher stress capital buffer on top of the minimum requirements so that it can better handle such a scenario. If the bank performed well and handled the stress test, it would get a lower stress capital buffer add-on.

Investors should know that this is a key time for bank stocks, as the stress tests could provide a boost for the stock, or detract from it. This year is particularly interesting for a few reasons.

Bank stocks surged last year on strong stress test results

Last year the major banks passed the stress test with flying colors, with the stress capital buffers of the largest banks decreasing significantly from 2024. It may have had something to do with a stress test that was considered easier and less rigorous than those in the past.

Of the biggest banks, Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC) all saw their buffers drop to the bare minimum of 2.5%. Wells Fargo saw the biggest drop, from 3.70%, while JPMorgan Chase and Bank of America fell from 3.30% and 3.20%, respectively. Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS), and Citigroup (NYSE: C) also saw declines, but not to the bare minimum.

This brought down the CET1 ratios for the banks, which had immediate benefits. One, it shows that the bank is healthy; two, it means that less needs to be locked up as an equity cushion so that money could be allocated elsewhere; and three, it allows banks to return more capital to shareholders via dividend increases or buybacks.

Last year, all of the banks boosted their dividends in the third quarter of 2025, except JPMorgan Chase, which did it in Q4. Also, several large banks did share buybacks following the stress tests. These are favorable events for investors.

The banks generally saw their stock prices jump following the stress tests, and they finished the year strong. The six largest banks posted stock price returns of more than 25% in 2025, with Citigroup leading the way at 66%.

What to expect this year

This year, the test is considered tougher than last year's, meaning the Fed concocted a more adverse scenario in which unemployment spikes to 10%.

However, the Fed voted back in February to freeze the buffers for 2026, so the numbers won't change, no matter how badly a bank fails or how fantastically it succeeds. The reason? The Fed is taking public feedback on new calculations models for the tests. Among the potential changes is a rolling two-year average to smooth out the potential for volatility. The freeze is in place until 2027 as these changes to the model are finalized.

So, in a way, this is good because the reduced buffers from last year remain in place, meaning the banks won't have to raise their capital cushions. That, in turn, frees up funding to reward shareholders with dividend increases. Since 2020, Goldman Sachs, Bank of America, Wells Fargo, and Morgan Stanley have boosted their dividends in the third quarter, while Citigroup and JPMorgan Chase have done so since 2022.

However, if the stress test results aren't great for a bank, those results will be known when the Fed releases them by June 30. And even if the buffers don't change, investors will know that the bank is at a higher risk than it was the previous year. That could potentially put a damper on dividends and buybacks.

Last year, the results were released on Friday, June 27. This year, look for them around June 25 or 26.

One difference is that most large bank stocks are down year to date this year and trading at lower valuations compared to last year. If stress test results are strong, the lower valuations could be an additional catalyst for these stocks.

Bank of America is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.