Stress testing occupies a prominent place in modern financial stability practice. It is widely used, increasingly sophisticated, and often highly visible. Yet it is also frequently overstretched—asked to predict crises, certify resilience, or deliver assurance in systems that are inherently uncertain and adaptive. When stress testing is treated as a predictive or validating tool, it risks creating false confidence rather than preparedness.
Stress Testing Without Illusion begins from a different premise. Once the structure of the financial ecosystem is understood, stewardship arrangements are clarified, and systemic vulnerabilities are made legible, stress testing serves a precise and bounded role: exploring how known fragilities behave when they are placed under strain. This volume reframes stress testing not as a measurement technology, but as a governance-relevant exploration of system behavior under uncertainty.
What this report does
This volume establishes stress testing as a disciplined form of inquiry within financial ecosystem stewardship. In particular, it:
- Positions stress testing as conditional exploration, focused on behavior rather than prediction
- Explains why scenario-first stress testing can mislead when it is not anchored in prior diagnosis
- Shifts the analytical starting point from events to stress dimensions that act directly on diagnosed vulnerabilities
- Traces how stress propagates, amplifies, or is absorbed across institutions, markets, infrastructures, and governance arrangements
- Treats stress testing as a test of governance capacity, revealing coordination frictions, escalation delays, and institutional reaction functions under strain
Rather than estimating losses or certifying resilience, the report clarifies how stress testing can inform preparedness, contingency thinking, and institutional learning—without collapsing uncertainty into spurious precision.
Position within the Financial Ecosystem Stewardship Series
Stress Testing Without Illusion is the fourth volume in the Financial Ecosystem Stewardship Series developed by Bank & Finance Consulting Group.
The series treats financial stability as a problem of stewardship under irreducible uncertainty, organized as a deliberate sequence:
- Design — defining the architecture and trade-offs of the financial ecosystem
- Governance — stewarding coherence under fragmented authority
- Diagnostics — making systemic vulnerabilities legible to governance
- Stress Testing — exploring how diagnosed fragility behaves under strain
- Institutionalization — sustaining judgment and capacity over time
This volume completes the transition from legibility to exploration. Diagnostics identify where fragility resides; stress testing examines how that fragility propagates, amplifies, or triggers regime shifts once strained. It does not replace governance. It prepares it.
Intended audience
This report is written for those responsible for system-level financial outcomes, including:
- Central banks and financial supervisory authorities
- Finance ministries and macro-financial policymakers
- Multilateral development banks and international organizations
- Senior decision-makers concerned with systemic resilience and governance capacity
It assumes familiarity with financial stability concepts and focuses on interpretation, propagation, and judgment, rather than technical modeling or policy prescription.
Why this matters
Repeated episodes of financial stress have shown that crises are rarely driven by the severity of an initial shock alone. They emerge from interaction, amplification, delayed effects, and governance constraints that become binding under strain. Stress testing, when properly positioned, makes these dynamics visible before they are encountered in real time.
By insisting on explicit limits—what stress testing can inform and what it cannot justify—this volume argues that credibility in financial stability practice rests on humility, not comprehensiveness. Stress testing clarifies exposure, not destiny. It informs judgment without replacing it.
Stress Testing Without Illusion sets the stage for the final volume of the series, Institutionalizing Financial Ecosystem Stewardship, which examines how the insights generated through design, governance, diagnostics, and stress testing can be embedded into enduring institutional capability over time.
Read the full report:
Stress Testing Without Illusion: Exploring Systemic Fragility After Design, Governance, and Diagnosis
