Sudden asset price changes can lead to financial instability when they interact with other vulnerabilities, such as high leverage or correlated exposures.8 Scenario analysis is a useful tool in assessing the links between climate-related risks and economic outcomes because it requires assessing the implications for financial stability and individual financial institutions in a systematic way.
The interactions across institutions and market segments must be traced out, and missing data must be identified, acquired, and analyzed, leading to a clearer picture of the transmission of risks. Scenario analysis should ultimately facilitate estimating the possible effects on individual financial institutions as well as on financial markets more broadly.