From a financial stability perspective, understanding how the macroeconomic environment affects the health of banks, how banks assess their exposure to macroeconomic risks, and taking preventive action if macroeconomic risks are underestimated is thus crucial. At the same time, modelling exposure to future macroeconomic risks is challenging. Adjustment patterns of the past may not be very informative with regard to future risks.
Yet, our formal models and informal heuristics largely rely on observations from the past. This potential underestimation of risk is particularly relevant today. Given the benign macroeconomic and financial conditions during the past decade, models may not sufficiently account for adverse scenarios. The patterns in the data that we have seen in the past may paint an overly optimistic picture of the future.