In a keynote speech at an ECB-Bank of England conference, European Central Bank Executive Board member and Supervisory Board Vice-Chair Frank Elderson urged banks to look beyond risks that existing models can quantify and build resilience against climate and nature shocks whose probability, magnitude or transmission channels remain uncertain. While banks and supervisors have improved climate risk data, modelling and stress testing, he warned that historical data and current scenarios cannot fully capture tipping points, feedback loops, compound events and other non-linear effects. Elderson called for locally tailored and tail-focused scenarios, supported by expert judgment and regular challenge rather than narrow reliance on standard narratives. Climate stress tests and scenario analysis cover all risk drivers that banks themselves consider material in only around 15% of internal capital adequacy assessment cases. Banks should therefore address model limitations through sufficient capital and liquidity, operational capacity and strategic flexibility, alongside underwriting, pricing, portfolio steering, insurance and prudential transition planning. He said the same approach should extend to other sources of radical uncertainty identified in European banking supervision's 2026-28 priorities, including geopolitical fragmentation, demographic change, artificial intelligence and quantum computing. These structural risks require stronger scenario capabilities and governance that can respond quickly when previously unidentified threats emerge.
European Central Bank's Frank Elderson urges banks to strengthen resilience against unmodelled climate and nature risks
European Central Bank Executive Board member Frank Elderson urged banks to strengthen resilience against climate and nature risks that existing models and scenarios cannot fully capture. He called for broader, tail-focused scenario analysis supported by expert judgment, as well as sufficient capital, liquidity and operational flexibility. The approach should also cover uncertain structural risks from geopolitics, demographics, artificial intelligence and quantum computing.