We Are Living in a ‘Stress Test’ World

Stress testing often involves resilience to a single event, comparing projected losses with capital levels. In climate stress tests, the dollar value of projected loss is often much less informative than the qualitative gaps of internal capacity, governance and data quality they can expose, which are harder to reinforce than financial capital buffers.

Climate stress testing has moved up regulators’ agendas but shouldn’t be seen as just another stress testAssuming that climate change is a ‘stress event’ that just has to be weathered understates the permanence of climate risk for financial institutionsRegulatory stress testing is valuable where it highlights weaknesses in capacity, governance and data, which take time to fix in order to...