We develop a methodology to measure the expected loss of commercial banks in a market downturn, which we call stressed expected loss (SEL). We simulate a market downturn as a negative shock on interest rate and credit market risk factors that reflect the banks’ market-sensitive assets. We measure SEL as the difference between the mark-to-market value of the assets in the downturn and the book value of the liabilities. Based on large U.S. commercial banks, we empirically demonstrate that individual SEL predicts the loss of capital projected by banks in a severely adverse scenario and that aggregate SEL predicts macroeconomic variables.

Central banks are increasingly concerned about climate-related risks and want to ensure that the financial system is resilient to them. As they integrate these risks into financial stability monitoring, they also discuss how to apply environmental criteria to their own policy portfolio management, without compromising their policy mandate. We describe different strategies and assess their relevance for central banks, using the Swiss National Bank’s (SNB) equity portfolio as a laboratory. We develop a carbon-conscious screening approach that is likely consistent with its policy mandate. The approach reduces the portfolio’s carbon footprint by 20%, with little impact on diversification or performance.

Systemic risk may be defined as the propensity of a financial institution to be undercapitalized when the financial system as a whole is undercapitalized. In this article, we investigate the case of non-US institutions, with several factors explaining the dynamics of financial firms returns and with asynchronicity of time zones. We apply this methodology to the 196 largest European financial firms and estimate their systemic risk over the 2000–12 period. We find that, for certain countries, the cost for the taxpayer to rescue the riskiest domestic banks is so high that some banks might be considered too big to be saved.