Environmental sustainability and financial stability: can macroprudential stress testing measure and mitigate climate-related systemic financial risk?

Abstract

Despite widespread recognition among financial regulators and central banks that climate change may threaten financial stability, the causes and consequences of climate-related systemic financial risk remain underexplored. Stress testing has emerged as one of the most prevalent regulatory tools for addressing climate-related financial risks, and this article analyzes the role of stress testing in mitigating the effects of climate change on financial stability. Specifically, it synthesizes the multi-disciplinary literature on climate-related financial risk, financial stability, and stress testing to develop a framework for evaluating the capacity and effectiveness of stress tests for measuring and managing climate-related systemic financial risk. It then takes stock of climate stress testing proposals and early practices globally and applies the evaluative framework in comparative case studies of the Bank of England and US Federal Reserve. It concludes that stress testing can support the measurement and management of both microprudential and macroprudential climate-related financial risks, but the benefits of stress testing vis-à-vis climate change and financial stability are largely unrealized. Addressing the disconnect between climate stress testing policy motivation and implementation as well as the divergence between leading and lagging jurisdictions will require both interagency and international regulatory cooperation.

Prudential net zero transition plans: the potential of a new regulatory instrument

“…There are significant limitations of applying the existing approach to C&E risks [13,18,22]. There are epistemic obstacles to the measurement of financial risk based on historical data gathered over a limited timeframe [2,14,37] and supervisors have therefore been reluctant to challenge assumptions concerning specific risk-weightings assigned to transition risk because of questions over how to assign risk-weights to individual assets [54].…”

Experimental study and clustering of operating staff of search systems in the sense of stress resistance

“…The purpose of the article Battiston and Martinez-Jaramillo ( 2018 ) is to study the organizational aspects of stress testing and to determine the place and functions of the supervisory body in the process of stress testing. The methods of quantitative and integral assessment of personnel stress in the process of knowledge verification during attestation are analyzed in Iannello et al ( 2017 ) and DeMenno ( 2022 ).…”

A Novel Methodology Analyzing the Influence of Micro-Stresses on Human-Centric Environments

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