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March 20, 2020

New stress-test scenarios for COVID-19

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In response to the COVID-19 pandemic and the threat it represents to society, the economy, and financial markets, the 2° Investing Initiative network will be launching a series of emergency response measures to support our stakeholders and members in managing and mitigating the crisis.

The speed and magnitude of the disruption might eventually – based on our preliminary modelling – exceed the scale of past stress tests. Moreover, as with climate, many shocks are cross-cutting, based on specific sector characteristics (e.g. sectoral exposure to people’s movements) that are not considered in existing stress-tests. 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.

Building on its data, methodology and partnerships with supervisory authorities, insurers and banks on long-term stress-testing on climate, 2DII will support a rapid response to help integrate the COVID-19 risk into the ongoing stress-testing, risk management and mitigation exercises that will be necessary in the coming months.

As part of this exercise, we will be extending our existing partnerships with financial supervisors on climate stress-testing and scenario analysis to applying ‘snap stress-tests’ using a series of COVID-19 stress-test scenarios. We will be working with the European Insurance and Occupational Pensions Authority (EIOPA) in the context of our existing partnership to use these scenarios as a way to strengthen their analysis of potential future market impacts of the COVID-19 crisis.

Today, we are publishing a discussion paper outlining six COVID-19 stress-test scenarios for use by our stakeholders. To our knowledge, these are the first stress-test scenarios for COVID-19 that have been developed. These scenarios will be improved on an ongoing basis in the next few months, integrating all the available inputs from other supervisors, financial institutions, credit rating agencies, and the broader research community, as the situation evolves.

We also plan to launch a dedicated website designed to bring all the analytical resources together on the COVID-19 crisis as a repository for information, analytical insights, and tools to respond to the crisis. Email us with material you are developing or aware of to feature on that platform.

To support this response, 2DII will temporarily reallocate some of its resources dedicated to climate stress-testing. We welcome every technical input and expression of interest to join forces on this effort.

Read the report here.

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