Financial institutions cannot predict the next geopolitical or market shock, but they can prepare for it. Industry experts argue that agile stress testing, expert collaboration and explainable scenarios are becoming essential as volatility, sanctions and
Financial institutions should stop
trying to predict the next market crisis and instead invest in the preparation
needed to respond before volatility spirals beyond control.
That was the central message
delivered during a specialist discussion on counterparty credit risk at
CeFPro’s Risk Evolve conference earlier this year.
During the debate, a senior market
risk executive argued that resilience depends less on forecasting individual
events than on developing agile operating models capable of translating
geopolitical shocks into timely, explainable risk scenarios.
"Volatility doesn't arise
politely," the senior executive said. "It erupts."
From elections and tariffs to
commodity shocks and armed conflict, today's market disruptions are repricing
assets at a pace that challenges many traditional risk management frameworks.
The speaker argued that while
organizations have become highly effective at governance, many operating models
remain optimized for stable markets rather than periods of rapid disruption.
The discussion suggested artificial
intelligence may eventually help address that imbalance by compressing
research, accelerating analysis and improving scenario design.
However, participants emphasized that
technology alone cannot replace the expertise required to interpret complex
market events.
"Access to SMEs matter more than
your access to data," the executive said.
Rather than relying exclusively on AI
or large datasets, successful stress testing depends on bringing together
economists, market strategists, traders, risk managers and subject matter
experts to assess events through a common lens.
That collaboration, the speaker
argued, consistently produces more meaningful scenarios than purely
quantitative approaches.
Historical context was identified as
another essential ingredient.
Organizations should maintain a
well-calibrated inventory of historical crisis scenarios that can be adapted as
new events emerge, rather than constructing entirely new frameworks whenever
markets become volatile.
The executive explained that
understanding previous crises provides valuable context for interpreting future
events, even when individual market shocks differ significantly.
Artificial intelligence can
strengthen that process by identifying similar historical episodes and
explaining why particular assets reacted as they did rather than simply
highlighting statistical relationships.
The importance of preparation was
illustrated through the organization's early response to COVID-19.
Although initial assumptions about
the pandemic proved substantially wrong, the executive explained that having an
initial scenario already developed allowed rapid recalibration as events
unfolded.
"We were completely wrong in
terms of calibration," he acknowledged. "But we were the only ones in
the firm who had something."
That early preparation allowed
specialists to refine assumptions continuously as economists, strategists and
risk teams developed a clearer understanding of evolving market conditions.
Throughout the session,
explainability emerged as a recurring theme.
Stress testing, the executive argued,
remains one of the few risk disciplines easily understood by boards because it
communicates potential losses through realistic scenarios rather than technical
statistical measures.
