• Geopolitical tensions and market volatility have made enterprise-wide stress testing (EWST) a strategic necessity beyond regulatory compliance.
• EWST offers a holistic approach, assessing capital across credit, market, operational, and liquidity risks in an integrated framework.
• Traditional stress models fail to capture interconnected risks like climate, cyber, and geopolitical shocks, requiring advanced scenario modeling.
• Financial institutions must evolve stress testing capabilities to enhance resilience, optimize capital, and maintain agility amid radical uncertainty.

Today’s unprecedented convergence of risk factors demands sophisticated stress testing capabilities.

As regulatory expectations intensify and market volatility persists, enterprise-wide stress testing (EWST) has evolved from a compliance exercise to a strategic imperative for capital planning and risk management.

 The current risk landscape

Today's operating environment presents complex, interconnected challenges. The ongoing Russia-Ukraine conflict continues to disrupt global supply chains and energy markets, while U.S.-China trade tensions create sustained uncertainty across technology and manufacturing sectors. Rising geopolitical fragmentation – from Middle East instability to potential Taiwan Strait tensions – compounds traditional financial risks with operational and reputational exposures.

These geopolitical dynamics intersect with persistent inflation concerns, central bank policy divergence and emerging market volatility. The result is a risk environment where traditional correlation models may fail, so financial institutions now require more sophisticated scenario analysis and stress testing frameworks.

 The strategic importance of EWST

EWST enables institutions to evaluate strategic plan resilience across multiple time horizons and stress scenarios. Unlike traditional stress testing focused on capital adequacy, EWST encompasses a holistic view of institutional capital – from money at rest in reserve buffers to money in motion through operational flows, as well as money at work generating returns across business lines:

• Integrated risk assessment across credit, market, operational and liquidity domains
• Dynamic scenario modeling incorporating geopolitical, climate and cyber risk factors
• Strategic planning validation under adverse conditions
• Capital optimization through forward-looking stress analysis

 Addressing multi-dimensional risks

Modern EWST frameworks must capture the interconnected nature of contemporary risks. Geopolitical tensions can trigger commodity price volatility, currency fluctuations and supply chain disruptions simultaneously. Climate risks intersect with political stability in vulnerable regions. Cyberthreats escalate during geopolitical crises, as evidenced by increased attacks following recent conflicts.

 The European Central Bank has emphasized that geopolitical risks differ from traditional risk drivers in their unpredictability and require “different analytical tools and preventive measures” due to their “radical uncertainty.”¹ This underscores the critical need for financial institutions to develop sophisticated scenario modeling capabilities that can handle these complex, interconnected risk factors.

Financial institutions need platforms that can model these complex interactions and generate synthetic scenarios that reflect realistic combinations of macroeconomic, geopolitical and operational stresses.

Implementation considerations

To implement EWST effectively, platforms must be able to track capital across all states – whether held as regulatory buffers (money at rest), flowing through payment systems and operational processes (money in motion), or deployed in lending and investment activities (money at work):

• Comprehensive data integration across all risk domains
• Scenario generation capabilities that capture tail risks and black swan events
• Dynamic capital modeling to assess organic capital generation under stress
• Actionable management information for strategic decision-making

Advanced EWST platforms should also provide integrated modeling, risk evaluation and reporting capabilities, enabling institutions to simulate hypothetical capital trajectories and assess strategic plan resilience across multiple stress scenarios.

 Resilient and ready

As geopolitical risks intensify and market volatility persists, EWST represents a critical tool for institutional resilience. By embracing comprehensive stress testing frameworks, financial institutions can better anticipate disruptions, optimize capital allocation and maintain strategic flexibility in an increasingly uncertain world.

SIDEBAR:

FIS® Balance Sheet Manager integrates data, modeling and risk evaluation in a unified platform that supports comprehensive EWST requirements. With Balance Sheet Manager, institutions can generate synthetic scenarios across macroeconomic, geopolitical, climate and operational dimensions, and then simulate capital supply and demand trajectories to assess strategic plan resilience and develop targeted risk mitigation strategies. For more information visit Balance Sheet Management Risk Software Tool or join the conversation at: https://www.linkedin.com/company/fis-balance-sheet-management.

¹ Buch, C. (2024), “Global rifts and financial shifts: supervising banks in an era of geopolitical instability,” ECB Banking Supervision, https://www.bankingsupervision.europa.eu/press/speeches/date/2024/html/ssm.sp240926_1~ebf2df6685.en.html