Scenario design and stress testing
Scenario design and stress testing construct plausible, severe future conditions to examine how systems and institutions would perform. They complement probabilistic analysis where data are scarce or futures are deeply uncertain. Systemic Risk Management stewards this page for the Nexus Consortium.
- 01InstitutionThe Global Centre for Risk and Innovation (GCRI)
- 02Service levelR0: information and enquiries
- 03In briefThe short answer
- 04The methodWhat scenario design and stress testing covers
- 05Reference practiceScenario and stress testing follow supervisory and planning practice
- 06In systemic risk workSevere, plausible and combined
- 07Applied inPlatforms that apply this method
GCRI · Institution · service level R0
The short answer.
Scenario design and stress testing construct plausible, severe future conditions to examine how systems and institutions would perform. Stress tests reveal vulnerabilities that arise when several risks materialise together. In the Nexus Consortium, Systemic Risk Management stewards its canonical page, and 8 other platforms apply it, including Foresight Nexus and Asset Management Nexus.
Systemic exposure in Brazil.
Where people and networks concentrate, the exposure through which shocks travel between systems, shown for Brazil as an example geography for this subject.
What scenario design and stress testing covers.
- 01
Core methods
narrative scenario development; reverse stress testing; macro-financial stress testing; multi-hazard scenario construction; tabletop exercises; cascading impact mapping.
- 02
Data and instruments
historical analogues; model outputs; expert workshops; supervisory scenario frameworks; exposure and balance sheet data.
- 03
Validation
Scenarios are reviewed for plausibility, internal consistency and severity relative to history. Exercise outcomes are compared with actual events when they occur.
- 04
Limits
Scenario choice can reflect prevailing assumptions and miss novel combinations. Results depend on how participants and models represent responses.
- 05
Use in risk decisions
Stress tests reveal vulnerabilities that arise when several risks materialise together. They inform capital, contingency and coordination plans across sectors.
Scenario and stress testing follow supervisory and planning practice.
| Reference | What it sets |
|---|---|
| NGFS scenarios | Climate scenarios for financial analysis |
| Supervisory stress testing | Severe but plausible scenarios |
| Reverse stress testing | Scenarios that break a system |
Severe, plausible and combined.
Scenarios explore futures that cannot be assigned reliable probabilities. Systemic stress tests combine shocks across systems: a heat wave with a grid failure and a cyber incident. Reverse stress tests start from failure and ask what would cause it.
- Combine shocks across systems.
- Use reverse stress tests to find vulnerabilities.
- Do not present scenarios as forecasts.
- Applications on Risk Management.
Platforms that apply this method.
- Systemic Risk ManagementInstitutionGCRI
- Foresight NexusInstitutionGRF
- Asset Management NexusInstitutionGRA
- Private Equity NexusInstitutionGRA
- Institutional Funds NexusInstitutionGRA
- Financial StabilityInstitutionGRA
- Climate and Nature Financial RiskInstitutionGRA
- Public Finance and Sovereign DebtInstitutionGRA
- Private CreditInstitutionGRA
Who maintains this page.
Systemic Risk Management stewards scenario design and stress testing: it keeps this description current and reviews how the method is applied across the platforms.
Terms used on this page.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| System-wide stress test | A stress test that models interactions among many institutions rather than one in isolation. |
| Margin call | A demand for additional collateral when the value of a position moves against the holder. |
| Reverse stress test | Starting from a failure outcome and identifying the scenarios that would cause it. |
| Exit freeze | A scenario in which sales and listings stall, delaying distributions. |
Where this page's references lead.
The bodies and documents this page is read against. Status and editions change; each link goes to the issuing body.
Where this page leads across the Consortium.
- Scenario design and stress testingGCRIApplied in Systemic Risk Management.
- Scenario design and stress testing for foresightGRFApplied in Foresight Nexus.
- Scenario analysis for portfoliosGRAApplied in Asset Management Nexus.
- Stress testing private portfoliosGRAApplied in Private Equity Nexus.
- Stress testing institutional fundsGRAApplied in Institutional Funds Nexus.
- Scenario design and stress testing for financial stabilityGRAApplied in Financial Stability.
- Scenario design and stress testing for climate and nature financial riskGRAApplied in Climate and Nature Financial Risk.
- Scenario design and stress testing for public finance and sovereign debtGRAApplied in Public Finance and Sovereign Debt.
- Scenario design and stress testing for private creditGRAApplied in Private Credit.
Questions and answers.
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How do I suggest a correction to a method page?
Around GCRI.
Start with an enquiry.
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.