Frank Elderson: Ensuring resilience in the face of uncertainty

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the ECB-Bank of England Conference on supervising climate risk in a non-linear world

It is a pleasure to open this joint ECB-Bank of England conference.

Bringing together experts across disciplines from 18 countries and three continents to discuss how we can ensure resilience in an increasingly non-linear world, this event could hardly be more timely.

For much of modern finance, risk management has rested on a simple but consequential assumption: with enough data, sufficient information about borrower behaviour, robust models and a solid understanding of historical patterns, banks can estimate the losses they may face with a reasonable degree of precision.

These estimates inform how banks price risk, set aside provisions for expected losses and determine how much capital they need to absorb any large, unexpected losses. This approach works well when the underlying relationships are broadly stable and has long served as a useful basis for managing financial risks. And of course, today’s modelling is already supplemented by additional layers of risk management, including model overlays, stress testing, underwriting, risk appetite setting and other processes.

But the world facing us today is becoming more complex, more interconnected and more uncertain almost by the day.

Think about geopolitical fragmentation, demographic change, artificial intelligence and quantum computing and, of course, the central theme of this conference: the risks from the ongoing climate and nature (C&N) crises.

These macro trends differ in many respects.