2° Investing Initiative, a think tank with expertise in climate stress-testing and scenario analysis, has developed what it says are to its knowledge the first stress-test scenarios for COVID-19.
The think tank is extending its existing partnerships with financial supervisors, such as the European Insurance and Occupational Pensions Authority (EIOPA), on climate stress-testing and scenario analysis to run ‘snap stress-tests’ using the newly developed stress-test scenarios.
It said the stress-test template it has developed will allow financial supervisors to simulate potential losses on banks’ and insurers’ balance sheets under six different pandemic scenarios over the next 36 months.
“The speed and magnitude of the disruption might eventually – based on our preliminary modelling – exceed the scale of past stress tests,” said 2° Investing Initiative.
“As with climate, many shocks are cross-cutting, based on specific sector characteristics – such as sectoral exposure to people’s movements – that are not considered in existing stress-tests.”
It added: “The ‘Minsky Moment’ described by the Bank of England for climate risks – mixing economic disruption, policy responses, and overnight shift in market sentiment – is happening now, at scale, for COVID-19.”
The modelling used for 2° Investing Initiative’s COVID-19 stress-test scenarios builds on work it has done on climate stress-test scenarios in partnership with the California Insurance Commissioner, the Bank of England, and EIOPA.
The development of the stress-test scenarios comes as the think tank temporarily reallocates some of its resources dedicated to climate stress-testing to support the response to the crisis.
“We welcome every technical input and expression of interest to join forces on this effort,” it said.