The 2025 DFAST Stress Test Results: Volatile Outcomes Highlight Need for Reform
The Federal Reserve’s 2025 stress test results showed a smaller projected capital loss compared to last year, driven by stronger income projections and lower loan losses. However, the test continues to produce significant year-over-year volatility across banks, argues a new BPI blog post. This complicates capital planning and forces institutions to hold excess capital as an uncertainty buffer.
- Why it matters: Stress test outcomes are linked to bank capital requirements. When projections vary sharply from year to year, it disrupts banks’ ability to plan, deploy capital and support economic growth.
- Behind the numbers: One major driver of this volatility is how the Fed projects pre-provision net revenue, which is dependent on recent bank performance. This “momentum effect” can materially swing results from one year to the next, even under similar economic scenarios.
- The fix: The Federal Reserve has recently acknowledged the limitations of its stress testing framework that contribute to this volatility, and is working to reduce it through averaging and other steps. The Fed has proposed averaging stress test results over two years to stabilize capital requirements; however, it has not confirmed whether the averaging proposal, when finalized, would apply prospectively, making it unclear whether final 2025 SCBs will be determined under new or existing rules. The Fed has also pledged to reevaluate PPNR models and disclose and seek public comment on the stress test models and scenario design framework.
Taken together, these changes should result in more stable and predictable bank capital requirements in the future.
Four Key Things
1. CFPB Rule in Court: The Latest on Section 1033
The Financial Technology Association filed a motion for summary judgment in defense of the CFPB’s Section 1033 data-sharing rule on Sunday, June 29, in ongoing litigation urging the court to uphold the rule. The group argued that federal law (the Consumer Financial Protection Act) authorizes consumers and “their representatives,” which they say could include fintech companies, to access consumers’ financial data from their banks. BPI, a co-plaintiff in the litigation, has called on the court to vacate the rule and responded to this motion by urging FTA’s member companies to continue to work with banks to enhance the robust data-sharing ecosystem that exists today. “Instead of trying to salvage a rule that undermines banks’ ability to protect consumers’ most sensitive data, FTA’s members should continue to work with banks to further develop the secure, competitive data-sharing ecosystem that exists today because of private sector collaboration and innovation,” BPI Co-Head of Regulatory Affairs Paige Pidano Paridon said in a statement.
2. Nonbanks Signal Renewed Push for National Bank and Trust Charters
A growing contingent of fintech and crypto firms is seeking national bank and trust charters, signaling a renewed effort to formally enter the banking sector. In recent days, Circle, Ripple, Wise and Erebor Bank have all filed applications for federal charters.
Wise applied to create a national trust bank charter, and it has been reported that Circle and Ripple have done the same. A trust charter would allow them to engage in a limited range of activities; national trust companies generally do not engage in deposit-taking or lending activities. These charters are regulated by the OCC and, if approved, these companies would join Anchorage Digital, currently the only digital assets firm with an approved charter.
Erebor Bank, backed by Palmer Luckey and Peter Thiel, applied for a de novo national bank charter, with the goal of serving crypto and tech companies and other startup businesses. Erebor’s application indicates it would seek to be a full-service institution that would take deposits and apply for FDIC insurance, make loans and process payments.
These applicants may perceive these actions as a possible means to an end in obtaining a Federal Reserve master account. Indeed, Wise notes in its application that it intends to apply for a master account, while Ripple’s subsidiary, Standard Custody & Trust Company, already applied for a Federal Reserve master account on Monday.
These moves come as Congress continues to negotiate legislation that would create a federal framework for stablecoins. Despite ongoing efforts, key issues, including whether stablecoin issuers could offer interest-bearing products, remain unresolved. BPI has expressed concerns about granting nonbanks and crypto firms access to banking charters, particularly when those firms are not subject to the full range of prudential standards required of banks and seek to gain access to the federal payments system.
3. Bank Groups Call for Swift, Secure Transition as Treasury Phases Out Paper Checks
The Bank Policy Institute, The Clearing House Association and the Consumer Bankers Association submitted joint comments to the U.S. Department of the Treasury this week urging prompt action to fully transition to secure, modern electronic payment methods and minimize the use of checks. The letter — submitted in response to a Treasury request for information relating to the Executive Order on Modernizing Payments — emphasized the importance of eliminating paper checks from government disbursements to reduce risk and ensure all recipients benefit from faster, more reliable payment delivery.
“Removing paper Treasury checks from circulation is an important step toward reducing theft and the related losses to the federal government and financial institutions,” the groups wrote. “Treasury’s efforts to phase out paper checks in government payments represent a critical opportunity to modernize America’s payment infrastructure, reduce fraud and increase financial security for American taxpayers.”
By the Numbers:
- Check fraud accounted for about 32% of all fraud losses in 2024, according to Federal Reserve data.
- Many of these checks are acquired through mail theft. According to a FinCEN study examining reports from February to August 2023, mail theft alone resulted in $688 million in losses.
- Treasury checks are frequent targets for fraudsters. The checks are issued in high volumes, and regulations generally require that funds from Treasury checks be made available the day after deposit.
- Older generations of Americans are more likely to prefer checks. One study found that each additional year of age increases the likelihood of preferring checks by about 0.5%.
Recommendations:
To achieve the Executive Order’s payment modernization goals, the groups recommend Treasury:
- Launch a public awareness campaign to educate consumers on the speed, simplicity and security of electronic payments.
- Expand the government’s use of existing secure electronic payment platforms, such as The Clearing House’s ACH service (the EPN® network) and Early Warning Service’s Disbursements with Zelle®, and other modern payment solutions, which are both secure and user-friendly.
- Invest in fraud detection and prevention tools, such as identity verification capabilities.
- Limit exceptions to electronic payments and continue to work with banks to detect counterfeit or altered checks.
- Study government payment data to better understand why some consumers still rely on paper checks.
To access a copy of the letter, please click here.
4. Post-Crisis Regulatory Reforms and the Decline of Securitization
Securitization is an engine for efficient financing of business and household lending. This process – pooling cash flows from a portfolio of similar assets and transferring them to a bankruptcy-remote trust, which then issues securities based on the cash flows – can allow lenders to manage balance-sheet risk more effectively and access a broader pool of investor capital and more efficient financing. The result: expanded and less expensive access to credit for households and businesses.
- State of play: Securitization increased rapidly during the 2000s in the U.S., but its role in the Global Financial Crisis left long-lasting impacts. One important factor in the decline in U.S. securitization in recent years is the regulatory reforms enacted after the crisis. A new BPI post examines the role of these reforms and revisits prior U.S. Treasury Department recommendations on how to recalibrate them to promote a more vibrant securitization market. These recommendations could re-emerge in the current administration, the post suggests.
- The decline: This post examines the share of overall lending that is securitized in certain key market segments and shows how that share has declined, in some cases markedly, since the GFC. For example, the share of auto loans in securitized form averaged 24 percent from 2000-2007 and declined to 18 percent on average thereafter. The use of securitization to finance credit-card receivables ranged from 31-39 percent between 2000-2009, then declined to only 5 percent by 2021.
- Regulatory factors: A U.S. Treasury report from 2017 recognized the merits of overhauling residential mortgage securitization after the GFC, but also recommended recalibrating certain policies to revitalize securitization: bank capital and liquidity regulation, risk retention requirements and investor disclosures.
Learn more here.
In Case You Missed It
SCOTUS Ruling Looks Favorably on Banking Agency Funding
A Supreme Court opinion issued late last week suggests the unusual funding mechanisms employed by some federal banking agencies are constitutional. The case, Consumers Research v. Federal Communications Commission, raised the question of whether the FCC’s system of internet subsidy funding violated the non-delegation doctrine of the Constitution, which prohibits the delegation of Congress’s law-making powers to other branches of government or entities. The Fifth Circuit previously ruled that the funding scheme did violate the nondelegation doctrine, but the Supreme Court overturned that ruling. The opinion appears to uphold certain funding schemes used by federal banking agencies as constitutional: “The alternative test Consumers’ Research and the dissent propose also would throw a host of federal statutes into doubt. Relying on this Court’s nondelegation precedents, Congress has often enacted statutes empowering agencies to raise revenue without specifying a numeric cap or tax rate. … Indeed, such statutes are endemic in the sphere of financial regulation,” naming funding structures of the FDIC, Federal Reserve Board and OCC. “In none of those (or many other) revenue-raising statutes does a number appear. So all would be on the constitutional chopping block under Consumers’ Research’s reasoning.”
Senator Thom Tillis Not Running for Reelection
Sen. Thom Tillis (R-NC) announced he will not seek re-election in 2026. Tillis said he had been weighing retirement, citing frustration with partisan gridlock and a desire to spend more time with family. His decision comes shortly after voting against a high-profile GOP bill and facing criticism from President Trump. “It’s become increasingly evident that leaders who are willing to embrace, compromise, and demonstrate independent thinking are becoming an endangered species,” Tillis said in a statement.
A member of the Senate Banking Committee, Tillis had prioritized bank supervision reform and regulatory tailoring.
Regulators’ Role in ‘Debanking’ in Focus
The issue of bank account closures came into focus among policymakers in recent days.
- ‘They can do anything they want’: President Donald Trump last Friday emphasized the role of bank regulators in customer account closures, sometimes known as “debanking”: “They can do anything they want. The regulators control the banks,” Trump said. “It’s not the president of the bank. The president of the bank is far less important to a bank than a regulator, and a regulator can put that bank out of business … They really control it. So there is a lot of debanking. Those people are very bad and very dangerous, and they shouldn’t be doing it.”
- Congressional oversight: Rep. James Comer (R-KY), chairman of the House Committee on Oversight and Government Reform, sought details on bank regulators’ role in account closures in a recent letter to Acting Comptroller Rodney Hood. Comer expressed concern about “debanking” of crypto firms in particular and noted that the committee is investigating the issue. “Specifically, the Committee is focused on whether the actions are self-initiated by financial institutions or done at the direction of government regulators,” Comer said in the OCC letter, which followed scrutiny of the FDIC on similar topics. Both the OCC and FDIC have recently reversed or rescinded policies that established significant barriers to banks engaging with crypto.
