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European bank stress tests demonstrate need for risk modelling and catastrophe insurance


Yesterday the Committee of European Banking Supervisors announced the results of a month long stress test of 91 European banking institutions. The banks have been subjected to this examination to test whether they would be able to survive a second recession or other financial market shocks.

It’s a shame that it has taken a near banking system collapse in some countries for these stress tests to be put in place. Banks should be subjected to the same rigorous risk assessment and modeling as insurance-linked securities and catastrophe bonds on a regular basis whether there are concerns about the market or not. It would seem that there could be an opportunity for reinsurance risk modelling firms to branch out to measure these financial and operation banking risks.

We’ve written previously (here and here) about the need for new methods of risk management and hedging for the banking system. The current financial crisis and the issues faced by countries such as Iceland and Greece have highlighted weaknesses in the risk management and disaster planning methods used by banks. The call for banks to adopt contingent capital as part of their recovery plans now seems essential and we hear that there are moves underway to assess whether a form of catastrophe bond product could be launched for the financial sector.

Only 7 of the 91 banks failed the stress test but that is enough to demonstrate that the banking sector may need to look more closely at its risk management and transfer provisions.

The BBC have some great coverage on the banking stress tests here.

The Committee of European Banking Supervisors announcement and details of the results are available here.

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