Central Banks Redefine Stress Testing for a New Age of Risk

In a complex and uncertain macroeconomic and geopolitical landscape, central banks and regulators continue to adapt their stress testing methodologies to better prepare financial institutions for a growing array of risks. 

Speaking at CeFPro’s 2025 Climate Stress Testing Europe event, the Head of Climate Economics at a leading European central bank offered a perspective rooted in macroeconomic expertise and regulatory experience. 

His message – that stress testing needs new thinking to be effective in a modern global financial environment – underlined the importance of agility, data, and systemic awareness in managing climate and broader emerging risks.

Drawing from decades of experience in economic forecasting and scenario analysis, the executive opened by emphasizing the core regulatory purpose of stress testing.

The point, he argued, is not necessarily to predict risks more accurately than financial institutions, but to set expectations and incentivize the development of tools and data necessary to identify and mitigate them. 

At the heart of this process lies data. Without robust, granular, and sector-specific data, stress testing exercises remain limited in scope and effectiveness.

The shift in macroeconomic complexity over the past two decades has only heightened the need for more sophisticated analysis. 

Gone are the days when a handful of indicators like GDP, inflation, and interest rates sufficed to depict economic conditions.Today’s environment requires a deeper, more nuanced understanding, particularly of sectoral dynamics and transmission mechanisms.

One example gaining traction in the stress testing arena is the analysis of global supply chain vulnerabilities - a form of stress testing traditionally focused on industry, but with growing relevance for financial institutions given the interdependencies between clients, counterparties, and broader geopolitical developments.

Geopolitical risks, while not new, now pose a renewed challenge due to their irregularity, unpredictability, and systemic implications. 

These are difficult to model due to a lack of historical data, yet their impacts - on energy markets, trade routes, and inflation - can be swift and significant. 

Financial institutions, the speaker warned, must prepare for such "deep uncertainty" through scenario designs that capture not just the shocks themselves, but their cascading effects across the real economy and financial systems.