Geopolitical Risk Stress Testing: Lessons and Trends

Geopolitical risks and policy uncertainty have risen markedly since the mid‑2010s, particularly in the last few years. Conflicts in Ukraine and Iran and global trade wars have reinforced a reality that many risk professionals already understand: The effects of geopolitical shocks can spread quickly across borders, markets and balance sheets.

For financial services firms, geopolitical risks are not new. What has changed is the attention they receive from senior management and regulators, as well as the speed, frequency and sheer number of events and scenarios that banks must assess.

As shocks arrive faster, overlap more often and cause uncertainty for longer, banks must remain vigilant and prepared to manage their impact.

Geopolitical stress testing has emerged as one of the main tools banks can deploy to assess and manage their exposure. Yet for many institutions, geopolitical risk management remains a reporting exercise. That is no longer sufficient.

A Cross‑Cutting Risk

Geopolitical risk is a key macroeconomic driver that cuts across traditional risk categories, affecting credit, market, liquidity, business model, governance and operational risks simultaneously. It can affect banks through multiple channels, from the financial markets and broader economy to operational aspects such as the safety and security of bank operations.

Peter Plochan of SAS

This is precisely why geopolitical risk remains at the center of supervisory priorities. Regulators are not only asking banks to identify exposures but to take concrete actions to manage them. Banks must understand where geopolitical risk sits within the broader risk framework and how it interacts with other risks.

Geopolitical stress testing can provide insights into scenarios that could materially affect banks. It helps institutions identify relevant geopolitical events, quantify their impact and consider responses to reduce that impact. This might involve adjusting growth strategies, limiting new business or reducing existing exposures in high‑risk sectors.

Lessons Learned

I recently hosted a panel discussion for the Professional Risk Managers’ International Association (PRMIA), bringing together stress testing experts from leading banks and more than 100 risk professionals from around the world. The discussion focused on lessons learned in geopolitical risk stress testing and trends for which banks need to prepare.

Banking experts shared practical insights on how to design an effective geopolitical risk management process built around flexible stress testing capabilities.

Survey results from participants confirmed that stress testing is considered critical for robust geopolitical risk management, with 90% marking it as important or very important. Monthly geopolitical risk reassessments were seen as striking a good balance between adequate coverage and unnecessary administrative burden.

At the same time, participants emphasized that stress testing systems must allow for quick, on‑demand and ad hoc reruns to assess emerging developments.

Speed Matters

It is a certainty in today’s volatile business environment that slow risk management is bad risk management. Waiting too long to make decisions is what separates some risk managers from their more successful peers. Speed is no longer nice to have; it is a competitive and regulatory necessity.

Banks need processes and infrastructure that deliver timely insights. And stress testing results cannot end up as static reports, but must be turned into strategic actions.

This spotlights another key truth: Insight without action has zero value. Stress testing should be designed from the outset to trigger decision‑making. Roles, responsibilities and escalation paths must be clearly defined.

AI and advanced analytics can play a critical role here, helping translate complex outputs into clear business insights on which senior management can act.

Resulting actions may include carefully managing growth, reducing exposures or adjusting portfolio strategies in specific high‑risk sectors. Stress testing should facilitate portfolio decision‑making, where deviations are quantified, monitored automatically and flagged in near real time.

From Simulations to Decisions

Several PRMIA panelists highlighted the evolution toward a “stress testing decisioning engine.” In this approach, real‑time geopolitical monitoring triggers stress simulations automatically when predefined indicators reach specific thresholds. The results then initiate actions based on predefined decision flows and mitigation rules.

These processes can be orchestrated through automated, agentic AI workflows, managed with human oversight. Translating events and scenarios into portfolio actions is a great example of how emerging AI capabilities can be applied to enterprise risk management, not as a replacement for human judgment, but as an accelerator for insight and execution.

Overall, this approach represents a broad shift in how stress testing is viewed. What was once primarily a regulatory or analytical exercise is increasingly a core strategic capability. Banks that can react promptly to sudden geopolitical developments and assess their impact on specific customers and portfolios gain a clear competitive advantage. Having a predefined playbook enables unscheduled, ad hoc stress exercises the moment a crisis hits, eliminating the lag between external events and internal responses.

Doing More, Faster, with Less

Geopolitical risk stress testing is yet another demand placed on banks’ forward‑looking “what‑if” capabilities. Risk teams already support expected credit loss (ECL) calculations, business‑as‑usual stress testing and ICAAP (Internal Capital Adequacy Assessment Process) and regulatory ad hoc exercises. And they also run climate and nature risk simulations and perform strategy and transition planning.

Adding geopolitical stress testing to this long list creates significant strain on already stretched resources. Risk teams are already expected to assess more scenarios, perform new types of calculations, evaluate alternative modeling assumptions, reduce execution times, increase calculation frequency and maintain transparency and explainability.

Advanced technologies can help ease the strain. AI can support data sourcing, for example, by using large language models to gather public information on production sites or supply-chain dependencies. This type of data is a crucial input not only for geopolitical risk analysis but also for climate risk assessments.

Integration and standardization are important enablers. Centralizing the management and execution of forward-looking business and technology processes helps banks to reuse data, scenarios, models and results across teams.

An integrated stress testing platform improves efficiency, reduces duplication and helps institutions achieve meaningful synergies. This applies to geopolitical risk stress testing but also holds across other use cases including climate risk stress testing. Read more about the benefits of a central stress testing platform for climate risk in this SAS-UNEPFI white paper.

Banking risk teams have no choice but to become faster and more efficient while doing more. In a world of accelerating geopolitical uncertainty, there is no time to waste.

As EMEA Principal Risk Management Advisor at data and AI provider SAS, Peter Plochan helps financial institutions with finance and risk regulations, enterprise risk management, risk governance, stress testing, model risk management and more.