Second, stress testing could be used to profile the size of the skews from climate change to the returns of various businesses. 30 This is another area where insurers are at the cutting edge. Your capital requirements are based on evaluating the impact of severe but plausible scenarios. You peer into the future, building your defences against a world where extreme events become the norm. This stress-testing technology is well-suited to analysing tail risks likely to grow fatter with time, casting light on the future implications of environmental exposures embedded in a wide range of firms and investments. Stress testing, built off better disclosure and a price corridor, could act as a time machine, shining a light not just on today’s risks, but on those that may otherwise lurk in the darkness for years to come. Conclusion Our societies face a series of profound environmental and social challenges. The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longerterm prosperity. While there is still time to act, the window of opportunity is finite and shrinking. 31 Others will need to learn from Lloyd’s example in combining data, technology and expert judgment to measure and manage risks. The December meetings in Paris will work towards plans to curb carbon emissions and encourage the funding of new technologies.
A current subject of horizontal analysis is leveraged loans – specifically, whether lax underwriting practices for such loans could pose a significant risk to financial stability. In addition, we have reorganized the supervision group at the New York Fed in a number of ways that promote unbiased analysis and professional objectivity. Many of these changes directly reflect the recommendations in a 2009 report that I commissioned from David Beim, which was featured in the recent This American Life program about supervision at the New York Fed. For example: •  Over the last five years, we have reassigned some of our most senior personnel to front-line positions at the largest supervised institutions. We also recruited experienced executives with financial backgrounds from outside the New York Fed. The purpose of these personnel changes was to position leaders with the confidence and depth of professional experience necessary to challenge the leadership of supervised financial institutions. •  We increased training, especially for more senior examiners. Since 2011, we have required enhanced training for senior supervisory officers on corporate governance, business strategies, and risks. Our goal is to deliver stronger and clearer  4  BIS central bankers’ speeches  supervisory views to boards of directors and senior management. Also since that year, we have offered a customized management development program for managers in the supervision group. •  We hired more risk specialists and created the role of business-line specialist to assess the risks and vulnerabilities in firms’ business models.