Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—BPI discounts NGFS extreme climate scenario, (Oct 28, 2025)
Organizations Mentioned:Bank Policy Institute | Network for Greening the Financial System
A BPI article reviews the recent NGFS extreme weather event scenario that produces an economic collapse that would account for a loss of up to 5 percent of European economic output.
The Bank Policy Institute (BPI) has posted an article on its website, written by BPI Senior Fellow Greg Hopper, that reviews a hypothetical scenario that would produce an economic collapse of up to 5 percent of European economic output following extreme weather events. The scenario was put forth in a Network for Greening the Financial System (NGFS) “Disasters and Policies” scenario and was discussed in a recent speech by Frank Elderson, vice chair of the Supervisory Board at the European Central Bank (ECB). The article concludes that the stress test is “not statistically plausible” and “has no risk management value.”
Elderson noted in his speech that climate and nature risks are not just appearing at distant time horizons but are becoming an increasingly immediate concern for financial stability and economic growth—he cautioned that “in the next five years, extreme weather events could account for a loss of up to 5% of euro area economic output. That would be a shock similar in magnitude to the great financial crisis.”
The article states that this hypothetical comes from the NGFS’ new short-term scenarios. The NGFS is a global consortium of central banks and other regulators. The U.S. regulators have recently left the organization. The NGFS website states that its “climate scenarios are certainly a helpful tool,” but “they do not alleviate the responsibility of users, including banks and other (financial) organizations, to design and implement their own risk management frameworks.”
The scenario, which posits that a series of storms in the next few years could create a giant, global depression, is “probably less likely to occur than a civilization-destroying asteroid,” according to Hopper. Hopper questions how the scenario was incorporated into the economic models and argues that “regulators should not require banks to run or use this scenario (or similar ones), nor use it as a justification for higher capital.”
Skepticism warranted. The article states that skepticism of NGFS scenarios is “warranted,” asserting that the “projection of a massive near-term loss of economic output is based on assumptions about weather disaster scenarios that appear clearly untenable.”
A recent BPI study documented how the NGFS recently put into its long-term scenarios a model that heavily exaggerated the effect of climate change on economic growth, even though it could have or should have known the model is deeply flawed. Hopper states that the article even currently carries an advisory.
No risk management value. According to Hopper, while the scenario calibration details are “non-transparent and difficult to evaluate,” he estimates the likelihood of the scenario is very unlikely. Specifically, even under very conservative assumptions, “we find that a civilization-destroying asteroid strike is generally more likely than this NGFS climate scenario.” Further, Hopper writes that the Disasters and Policies scenario is “enormously less likely than the physical risks in the Fed’s 2023 pilot climate scenario analysis, which were calibrated to a once-in-200-year weather event.” The author concludes that an effective stress test “should be severe, but plausible,” but the Disasters and Policies scenario is not statistically plausible. As a result, the NGFS scenario “has no risk management value.”
The article stressed the importance that regulators base their climate risk management supervisory expectations on established, consensus science that can be independently checked and verified, not on hypothetical scenarios that have essentially a statistically zero probability of occurrence. The author writes that the NGFS scenarios are based on climate risks that are unsupported by any scientific evidence, so in attempting to direct how banks manage these (unjustified) risks, a banking regulator could end up guiding lending and capital allocation decisions surreptitiously. In developing climate risk management regulatory expectations, central banks should avoid becoming shadow climate policymakers and focus on objectively regulating banks’ management of their material risks, some of which are climate risks.
Companies: Bank Policy Institute; Network for Greening the Financial System
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