Big US banks boost dividends after stress tests lock buffers at 2.5%

The six largest US banks raised dividends in the third quarter after the Federal Reserve froze stress capital buffers at 2.5 percent, freeing billions for shareholder returns.

"The freeze is in place until 2027 as changes to the model are finalized," the Federal Reserve said in its February statement on the stress capital buffer rule.

Bank of America, JPMorgan Chase and Wells Fargo each saw their buffers drop to the 2.5 percent minimum last year, from 3.20 percent, 3.30 percent and 3.70 percent, respectively. Morgan Stanley and Goldman Sachs also saw declines but did not reach the minimum. The six largest banks posted stock returns exceeding 25 percent in 2025, led by Citigroup at 66 percent. Most large bank stocks trade lower year to date in 2026, with the KBW Bank Index down roughly 5 percent from its January peak.

The buffer freeze means banks can allocate more capital to dividends and buybacks rather than holding equity cushions. Results from this year's stress tests, expected around June 25 or 26, will be disclosed even though buffers remain unchanged through 2027. If the results are strong, the lower valuations on bank stocks could provide additional upside for investors.

How the Buffer Freeze Works

The stress capital buffer is an add-on to the minimum Common Equity Tier 1 ratio that banks must maintain. Dodd-Frank established the minimum CET1 ratio after the 2007-2009 financial crisis to ensure banks could survive a similar economic meltdown. The Fed's hypothetical stress scenarios determine how much additional capital each bank needs. Last year's easier test produced lower buffers across the board. This year's test assumes a more severe scenario with unemployment spiking to 10 percent, but the results will not change capital requirements. The Fed is taking public feedback on new calculation models, including a rolling two-year average to smooth potential volatility. The freeze will remain in place until those changes are finalized, likely by 2027.

Dividend Increases Follow Lower Requirements

All six major banks boosted their dividends in the third quarter of 2025, except JPMorgan Chase, which raised its payout in the fourth quarter. Several also executed share buybacks after the stress tests. Wells Fargo, which had its asset cap removed by the Fed in 2025, gained additional flexibility to return capital. Since 2020, Goldman Sachs, Bank of America, Wells Fargo and Morgan Stanley have raised their dividends in the third quarter, while Citigroup and JPMorgan Chase have done so since 2022. The lower valuations on most bank stocks this year mean that positive stress test results could drive further gains, as the reduced buffers already in place support continued capital returns. For income-focused investors, the combination of higher dividends and share buybacks makes the banking sector an attractive option in a rate environment where the Fed has said it is in no hurry to cut further.

What This Means for Investors

The stress test results, even without buffer changes, serve as a health check on the banking system. Banks that perform well in the hypothetical recession scenario demonstrate resilience that can support higher payout ratios. With the CET1 ratios already above regulatory minimums and the buffer freeze locked in through 2027, the major banks have a clear runway to continue returning capital. The key risk is if this year's test reveals weaknesses that could pressure future buffer calculations once the freeze expires.

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