Key Points

Major banks delivered solid performances in last year's stress tests.
Those outcomes sparked a wave of dividend raises and share repurchases.
Since 2020, most large banks have increased dividends in the third quarter after receiving test results.

Each year in late June the biggest U.S. banks receive results from stress tests run by the Federal Reserve. These evaluations gauge how well a bank would hold up under a recession or other economic pressure.

The assessments originated from the Dodd-Frank legislation after the 2007-2009 financial crisis to ensure banks could withstand another severe downturn.

The outcomes set the size of each bank's required capital cushion, known as the stress capital buffer. Dodd-Frank sets a baseline Common Equity Tier 1 ratio. Banks that lose more capital in the hypothetical scenario face a larger buffer on top of the minimum, while stronger results lead to a smaller add-on.

Investors watch this period closely because the findings can lift or weigh on bank shares. Several factors make this year's round especially noteworthy.

Bank stocks rose sharply after last year's favorable results

Last year the largest banks cleared the tests comfortably, and their stress capital buffers fell markedly from prior levels. The scenario used was viewed as less demanding than earlier versions.

Among the biggest names, Bank of America, JPMorgan Chase, and Wells Fargo saw buffers drop to the floor of 2.5 percent. Wells Fargo recorded the largest decline, moving from 3.7 percent, while JPMorgan Chase and Bank of America fell from 3.3 percent and 3.2 percent. Morgan Stanley, Goldman Sachs, and Citigroup also posted reductions, though not all reached the minimum.

Lower buffers reduced required CET1 ratios, freeing capital for other uses. This signaled financial health and allowed greater returns to shareholders through higher dividends or buybacks.

All major banks raised dividends in the third quarter of last year except JPMorgan Chase, which acted in the fourth quarter. Several also launched share repurchase programs. Stock prices climbed after the announcements, and the six largest banks finished the year with gains above 25 percent, led by Citigroup at 66 percent.

Expectations for this year's tests

The current test features a tougher scenario, including unemployment rising to 10 percent. However, the Fed decided in February to hold buffers steady for 2026 regardless of individual results. The pause allows time for public comment on revised modeling, including a possible two-year rolling average to limit year-to-year swings. The freeze extends through 2027.

Banks therefore keep the lower buffers set last year and do not need to build extra cushions. That leaves room for additional capital returns. Since 2020, Goldman Sachs, Bank of America, Wells Fargo, and Morgan Stanley have raised dividends in the third quarter, while Citigroup and JPMorgan Chase have done so since 2022.

Still, weak individual results released by June 30 could signal higher risk and temper enthusiasm for payouts or repurchases. Last year's findings came out on Friday, June 27; this year's are expected around June 25 or 26.

Most large bank stocks trade at lower valuations than a year ago. Solid test outcomes could provide extra lift given those discounted levels.