The Federal Reserve will release its annual stress test results next Friday — a high-stakes assessment that could cost or save Wall Street’s largest banks billions. A solid report card from regulators could pave the way for increased share buybacks, higher dividends, more loan growth and new investments for Club holdings Wells Fargo , Goldman Sachs and Capital One . The Fed subjects U.S. banks with at least $100 billion in assets to the annual year exercise, which simulates severe economic downturns to assess how well firms can withstand financial shocks and how much additional capital each must hold to avoid insolvency. Ahead of 2025’s results, Wall Street analysts are striking a hopeful tone and say regulators will lower their stress capital buffers for many of the nation’s top banks. Regulators use the stress capital buffer, or SCB, to help determine how big of an emergency fund that each bank needs to keep on hand in case of a financial crisis. These requirements should come down this year because the stress test includes “less onerous scenarios” versus the prior assessment, according to analysts at Jefferies. Compared to 2024, banks will be tested in situations where there’s a smaller decline in the country’s gross domestic product, a smaller rise in the unemployment rate, and less aggressive declines in asset prices. Deutsche Bank analysts also expect regulators to loosen up. “Recall last year’s stress test was really hard with capital requirements rising. … We could see a reversal of most or even all of that this year in our view,” the firm wrote in a note this month. “We expect the stress test to be positive for the broader bank group.” The stress capital buffer is just one of the components used to calculate each bank’s overall Common Equity Tier 1 (CET1) ratio requirement, which is expressed as a percentage and acts as a floor that must be met. Each firm has a baseline CET1 ratio of 4.5%, a measurement of a bank’s core capital — largely common stock and retained earnings — versus its risk-weighted assets like loans and other investments. On top of that, they must also hold add another minimum 2.5% for its stress capital buffer, which means every big bank must have an overall CET1 ratio of at least 7%. For the largest banks, known as Global Systemically Important Banks, like Goldman and Wells, an additional capital surcharge is applied between 1% to 4.5%. All of our banks have CET1 ratios much higher than their minimum. This means that Goldman, Wells and Capital One all have adequate amounts of high-quality capital compared to their risk-weighted assets — and, as a result, are in a position to return some of their excess capital to investors. At the end of the first quarter of 2025, Goldman Sachs’ CET1 ratio was 14.8% versus the required 13.7%. Wells Fargo’s was 11.1%, above its required 9.8%, while Capital One was at 13.6% versus its floor of 10%. WFC YTD mountain Wells Fargo (WFC) year-to-date performance Some Wall Street analysts expect Wells Fargo to be a standout among peers when the 2025 results are released. Deutsche Bank, for example, predicted the bank will be “a winner” from the stress tests, in large part because of what happened with the stress capital buffer component in last year’s exam. In 2024, regulators required Wells Fargo to keep more capital in the emergency fund without “obvious reasons for such a large increase in our view,” analysts said. Now that the stress test is seemingly easier and Wells’ exposure to troubled industries like commercial real estate has improved, it may get more relief from the Fed than peers. “WFC has been working through [commercial real estate and] office exposure and the underlying earnings power of the company has improved,” the analysts said. If Wells Fargo does get permission to operate with a smaller capital cushion, that will free up resources for other uses — including, perhaps, returning some of it to shareholders. Even after last year’s somewhat surprising stress test results, Wells Fargo was still able to propose a 14% dividend increase. The bank can also lend more if its stress capital buffer is lower, boosting revenues for its consumer banking and lending division. More flexibility in capital can also lead to expansion in other businesses. That includes growing Wells Fargo’s budding investment banking division, which we’ve said is a great opportunity for the bank to further diversify its revenue streams and reduce its reliance on Fed-influenced interest-based income. With less capital tied up, Wells Fargo could offer more or larger bridge loans for the mergers and acquisitions it’s helping to close. The firm could also commit more of its balance sheet to bond issuances or underwriting initial public offerings as a result. GS YTD mountain Goldman Sachs (GS) year-to-date performance There’s also benefits for Goldman Sachs. Jefferies said big brokers like Goldman are “built better” in 2025 and are “poised for improvement” after the Fed imposed higher capital requirements last year. The analysts cited Goldman’s exposure to risk-weighted assets last year, which should “ideally keep the door open for buybacks to at least continue at recent levels and/or accelerate.” Goldman authorized $40 billion share buyback program in April. Additional capital allows the firm to grow its wealth management division further to help offset a muted investment banking business. Goldman’s wealth management business saw a double-digit revenue increase in fiscal year 2024. COF YTD mountain Capital One (COF) year-to-date performance Finally, there’s Capital one. This is the first time the credit card issuer will be subject to the test since completing its acquisition of Discover Financial last month. Capital One now has an even bigger balance sheet following the $35 billion deal, so we’re looking forward to seeing what kind of share repurchases management announces after results. “Overall, COF is well capitalized as a combined entity, and has ample flexibility to increase CET1 levels,” Jefferies analysts said. In general, there are still some question marks for the future of these tests and their implications for the banking sector. The Fed proposed several changes earlier this year to stress tests requirements following pushback from Wall Street executive after 2024’s more stringent rules. New changes could include averaging two year results and giving banks an extra three months to adjust to new capital buffer requirements. These are pending, however, and will not be included in this year’s results. There are trade-offs between these new requirements, though, according to Columbia Business School finance professor Yiming Ma. It’s a delicate balance of making sure the banks can do their job effectively and protecting the industry from another financial crisis. “If you ask the banks, they will always say the requirements are too harsh. If you ask the regulators, they say we need more requirements,” Ma told CNBC Monday. “I think the truth is somewhere in between. You want hard enough requirements that help you prevent the next financial crisis, but you also don’t want requirements to be too big to prevent banks from doing their day-to-day business.” Regardless of the regulatory uncertainty, our bank names have had a string of good news recently. Wells Fargo had its $1.95 trillion asset cap removed earlier this month after a seven-year long regulatory punishment tied to misdeeds that predated CEO Charlie Scharf’s tenure. It’s a big catalyst for the financial stock, and a key reason we first started a position in Wells. Meanwhile, Goldman’s crucial investment banking division looks to be improving as more companies decide to go public. On Tuesday, for example, Autodoc said that its upcoming public debut will value the online car parts retailer at nearly $3 billion. This follows other big name IPOs like Chime and eToro in recent weeks. Finally, in addition the closing of the Discover deal, Capital One’s customers appear to be holding up well despite a murky economic backdrop and questions about the health of consumers. CEO Richard Fairbank said last week that the company’s delinquency trends have steadily improved since the fourth quarter of 2024. (Jim Cramer’s Charitable Trust is long WFC, GS, COF. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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