Frank Elderson, member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the ECB Supervisory Board, opened a joint conference between the ECB and the Bank of England dedicated to supervising climate risks in a non-linear world.
He recalled that financial risk management traditionally relies on models based on historical data and borrower behavior, enabling estimation of potential losses and determination of necessary provisions and capital. However, this model is challenged by the increasing complexity, interconnection, and uncertainty of today’s world.
Among major trends, Elderson cited geopolitical fragmentation, demographic changes, artificial intelligence, quantum computing, as well as risks related to climate and nature crises. These phenomena evolve within complex systems where small disturbances can cause disproportionate effects through feedback loops and tipping points.
He distinguished measurable risk from radical uncertainty, a concept developed by Frank Knight, John Kay, and Mervyn King, where future events, their probabilities, and outcomes cannot be confidently assessed. This radical uncertainty complicates risk management in the financial sector.
This intervention underscores the need to adapt banking supervision and risk management to address these non-linear and uncertain challenges, particularly in the context of climate crises and technological developments.
