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  • Writer's pictureWilliam Webster

Simple Uses for LLMs - Stress and Scenario Creation

In this fourth instalment of our series, we explore an intriguing application of large language models (LLMs) in treasury and risk management: envisioning future events and shaping our responses to them. This application is particularly compelling, considering that while we often concentrate on LLMs for text, visual, and data interpretation, I believe one of their true strength lies in sculpting business scenarios and strategies.

High-level scenario and strategy planning is a critical task for knowledge workers. Here, LLMs like GPT-4 shine, not by replacing human decision-making but by offering a wide range of potential outcomes and strategies, enriching our planning processes.


I put this to the test with GPT-4, prompting it to generate plausible yet severe scenarios for liquidity stress testing. The results were multifaceted. Initial prompts led to varied scenarios, including retail customer behaviour. Further prompting unearthed even more unconventional scenarios. GPT-4 didn't just list these scenarios; it grouped them into categories and this helped in deciding their use and applicability.


The real advantage of working with GPT-4 is evident here. The output can be used to identify gaps in your liquidity risk analysis or compare it with existing industry knowledge.


You can select any GPT-4 suggestion to spawn further discussions, evaluating their relevance and potential integration into your plans, including necessary updates to your mitigation strategies.


For instance, I delved into a scenario centred on social media-driven customer behaviour – not something I’m particularly familiar with. GPT-4 helped me understand how this could unfold, its potential impact on our operations, and possible mitigating measures.


Key Takeaways from This Use Case


  1. Scenario Development: LLMs like GPT-4 are formidable tools for crafting scenarios and strategies. I believe their role in business strategy will grow.

  2. Creative Assistance: GPT-4 rapidly generates scenarios, some amusing and far-fetched. It acts as a creative aide, but human discernment remains crucial in selecting the most pertinent scenarios.

  3. Effective Prompting: Tailoring prompts to your organisation's specific context enhances GPT-4's effectiveness. The more context and clarity provided, the more relevant the outcomes.

  4. Time Efficiency: GPT-4's swift responses save considerable time, allowing teams to focus more on discussion and evaluation rather than scenario generation. This underscores the value of human knowledge and experience when using LLMs.

  5. Strategic Application: Choosing relevant examples demonstrates the potency of this approach. GPT-4's suggestions on mitigating social behaviour risks can be integrated into your business strategy and tailored to your specific needs. This particular example may not be for you, but this analysis using GPT-4, facilitates change in what you do.


My conversation with GPT-4

Below are selected excerpts from my dialogue with GPT-4 on this topic. It's important to note that achieving these results required multiple prompts and some strategic thought in engaging with GPT-4. This is a common aspect of leveraging such a powerful tool effectively.

Me: Imagine I'm a risk manager working at a building society or bank. I want to explore and add some stress scenarios to our liquidity policy. We are predominately retail funded and our assets are mortgages, gilts and cash deposits at the Bank of England. We use swaps to hedge interest rate risk arising from fixed rate mortgage assets. The stresses should be severe but plausible. I am particularly interested in anything new or unusual. Use all your knowledge and expertise to give me some examples.

GPT-4: As a risk manager in a building society or bank with a portfolio primarily consisting of mortgages, gilts, and cash deposits at the Bank of England, along with the use of swaps for hedging interest rate risks from fixed-rate mortgages, your focus on developing severe but plausible stress scenarios for your liquidity policy is a prudent approach. Let's explore some innovative and unusual scenarios that could challenge your institution's liquidity position:

  1. Pandemic-Induced Economic Downturn: Consider a scenario where a global health crisis (similar to COVID-19) leads to a significant economic downturn. This could result in a sharp increase in unemployment, leading to a spike in mortgage defaults. Additionally, there might be a sudden withdrawal of retail deposits as consumers seek to cover living expenses, coupled with a drop in property values that affects the collateral value of your mortgage assets.

  2. Interest Rate Shock Combined with Inflation Spike: Imagine an unexpected, rapid increase in interest rates, possibly due to a sudden spike in inflation. This scenario would affect both sides of your balance sheet. On the asset side, the value of your fixed-rate mortgage assets and gilts could decline, while on the liability side, there could be pressure to increase interest rates on deposits to retain customers, squeezing your net interest margin.

  3. Technology-Driven Market Disruption: Envision a scenario where a technological breakthrough (such as a new digital currency or a disruptive financial technology platform) significantly alters consumer behavior. This could lead to a rapid outflow of retail deposits to these new platforms, creating liquidity strain. Additionally, this tech disruption could impact the real estate market, affecting the value of your mortgage assets.

  4. Regulatory Change Impacting Swaps Market: A sudden regulatory change or a political event that significantly alters the swaps market could be a stress scenario. For example, a change in regulation that increases the cost of using swaps or restricts their use could expose your institution to unanticipated interest rate risk, affecting your liquidity position.

  5. Climate Change-Induced Natural Disasters: Consider a scenario where severe climate events (such as floods, wildfires, or storms) significantly impact large geographical areas. This could lead to widespread property damage, affecting the value of mortgage collateral and potentially leading to increased defaults. Additionally, these events could disrupt economic activity, impacting retail deposits.

  6. Cybersecurity Incident Leading to Systemic Failure: A systemic cybersecurity incident that affects major financial infrastructure (like payment systems) could result in a temporary but severe disruption to liquidity. This could be due to the inability to access or move funds, combined with a loss of depositor confidence.

  7. Geopolitical Crisis Causing Market Turmoil: A geopolitical event, such as a major conflict or political instability in a key economy, could lead to significant market volatility. This could impact your gilt portfolio and potentially lead to a flight-to-quality, with depositors moving funds to perceived safer havens.

In each of these scenarios, it's crucial to assess not only the direct impact on your assets and liabilities but also the second-order effects, such as the impact on borrower behavior, market confidence, and operational capacity. Incorporating such scenarios into your stress testing exercises will enhance your institution's preparedness for a range of severe but plausible events, ensuring robust liquidity risk management.

Me: What about risks from the behaviour of retail customers or competitors?

GPT-4: Considering risks arising from the behavior of retail customers and competitors is indeed crucial for a comprehensive stress testing framework, especially for a financial institution like yours that relies heavily on retail funding and operates in a competitive market. Here are some scenarios that encompass these aspects:

  1. Mass Retail Customer Withdrawals: Imagine a scenario where a widespread rumor or negative news (true or false) about the financial health of your institution leads to a loss of confidence among retail customers. This could trigger a 'bank run' scenario, where a large number of customers simultaneously decide to withdraw their deposits, significantly straining your liquidity position.

  2. Shift in Customer Preferences: Consider a scenario where there's a sudden shift in customer preferences towards newer financial products or services offered by fintech companies or digital banks. This could result in a steady outflow of retail deposits as customers move their funds to these new offerings, impacting your funding base.

  3. Competitive Rate War: Envision a scenario where one or more competitors aggressively cut rates on mortgages or increase rates on deposits to capture market share. This could put pressure on your institution to follow suit to retain customers, impacting your net interest margin and potentially leading to liquidity strains if deposit rates are increased significantly.

  4. Competitor's Technological Advancement: A competitor’s breakthrough in technology, such as advanced online banking platforms or AI-driven financial advisory services, could attract a significant portion of your customer base. This shift could be particularly impactful if it targets a key demographic, like tech-savvy younger customers, leading to a gradual erosion of your deposit base.

  5. Competitor's Strategic Alliance or Merger: A major competitor could form a strategic alliance with another financial player or undergo a merger, significantly enhancing their market presence and product offerings. This could lead to a loss of competitive edge for your institution, potentially resulting in customer attrition and a reduction in new business.

  6. Competitive Disruption in Mortgage Market: If a competitor introduces an innovative mortgage product – for example, significantly lower rates or more flexible terms – it could lead to a significant shift in the mortgage market. Your institution might face a double-edged sword: losing existing customers refinancing with competitors and facing challenges in attracting new mortgage customers.

  7. Social Media-Driven Customer Behavior: In today’s digital age, social media can rapidly influence public opinion and customer behavior. A viral social media campaign (positive for a competitor or negative against your institution) could swiftly alter customer perceptions and behavior, leading to unexpected shifts in your customer base and deposit levels.

Incorporating these customer and competitor behavior-driven scenarios into your liquidity stress testing will provide a more robust understanding of potential risks and enable your institution to develop more effective strategies to mitigate these risks. It's also important to continuously monitor market trends, customer behaviors, and competitor actions to update these scenarios and ensure they remain relevant and plausible.

Me: Now add a few unusual scenarios we could consider

GPT-4: Adding unusual but plausible scenarios to your stress testing can help prepare your institution for a broader range of potential risks. These scenarios, while less conventional, could provide valuable insights into your institution's resilience. Let's consider some creative and unconventional scenarios:

  1. Digital Currency Disruption: Imagine a scenario where a major technology company or a consortium launches a new digital currency that rapidly gains popularity. This currency offers higher interest rates for savers and lower transaction costs, leading to a significant portion of your retail customer base transferring their deposits to this new digital currency, causing a sudden liquidity crunch.

  2. Social Movement Leading to Financial Behavior Shift: Envision a powerful social movement advocating for ethical and environmentally sustainable banking practices gaining momentum. This movement could influence a significant portion of your customer base, leading them to transfer their deposits to institutions perceived as more socially responsible, impacting your liquidity.

  3. Virtual Real Estate Boom in Metaverse Environments: With the growing interest in virtual worlds and metaverses, imagine a scenario where virtual real estate becomes a lucrative investment, diverting significant amounts of disposable income and savings from traditional assets like physical real estate to virtual properties. This could impact the mortgage market and lead to unexpected shifts in your customer's financial behavior.

  4. Global Supply Chain Crisis: Consider a scenario where a severe, prolonged global supply chain crisis significantly impacts the cost of living and doing business worldwide. This could lead to increased defaults on mortgages due to higher living costs and affect the employment sector, thereby impacting your retail customer's ability to maintain their deposits and financial commitments.

  5. Radical Regulatory Changes: A scenario where there's a sudden and radical overhaul of financial regulations, possibly driven by a global consensus on combating financial crimes or a major economic event. These changes could include stringent capital requirements or limitations on certain types of financial products, dramatically impacting your institution's operations and customer behavior.

  6. AI-Driven Financial Planning Trend: Artificial intelligence (AI) in financial planning becomes extremely sophisticated, leading to a trend where AI advisors recommend customers to diversify their assets away from traditional savings accounts and into a variety of new financial products. This could lead to a large-scale withdrawal of retail deposits as customers follow these AI-generated advice.

  7. Extraterrestrial Event Impacting Global Markets: While highly unlikely, a scenario involving a significant extraterrestrial event, such as confirmed evidence of extraterrestrial life, could lead to unprecedented market volatility. The uncertainty and media frenzy surrounding such an event could lead to erratic customer behavior, including panic withdrawals or hoarding of funds.

While some of these scenarios might seem far-fetched, they serve to challenge conventional thinking and help your institution prepare for a wide range of possibilities. The key is to evaluate the potential impact of these unusual scenarios on your liquidity, customer behavior, and overall market stability, and to develop strategies to mitigate these risks.

Me: Please create a list of all the stresses you have come up with

GPT-4: Absolutely. Here's a comprehensive list of all the stress scenarios we've discussed, encompassing both conventional and unusual risks:

Conventional Stresses

  1. Pandemic-Induced Economic Downturn: A global health crisis leading to economic downturn, mortgage defaults, and retail deposit withdrawals.

  2. Interest Rate Shock and Inflation Spike: Unexpected rise in interest rates due to inflation, affecting mortgage assets, gilts, and deposit rates.

  3. Technology-Driven Market Disruption: New digital currency or fintech platforms significantly altering consumer behavior and impacting retail deposits.

  4. Regulatory Change in Swaps Market: Sudden regulatory changes affecting the cost and usability of swaps, exposing interest rate risks.

  5. Climate Change-Induced Natural Disasters: Severe weather events damaging property and affecting the value of mortgage collateral.

  6. Cybersecurity Incident: A major cybersecurity breach affecting financial infrastructure, leading to liquidity challenges.

  7. Geopolitical Crisis: A major geopolitical event causing market volatility and affecting gilt portfolios and depositor confidence.

Behavior and Competitive Stresses

  1. Mass Retail Customer Withdrawals: A 'bank run' scenario triggered by loss of confidence among retail customers.

  2. Shift in Customer Preferences: Customers preferring new financial products or services, leading to retail deposit outflows.

  3. Competitive Rate War: Competitors significantly altering rates on mortgages or deposits, impacting net interest margin.

  4. Competitor's Technological Advancement: Loss of customers due to a competitor's technological breakthrough in banking services.

  5. Competitor's Strategic Alliance or Merger: A major market shift due to a competitor's merger or alliance, leading to customer attrition.

  6. Competitive Disruption in Mortgage Market: A competitor introducing an innovative mortgage product, affecting customer retention and acquisition.

  7. Social Media-Driven Customer Behavior: Rapid shifts in customer behavior influenced by viral social media campaigns.

Unusual Stresses

  1. Digital Currency Disruption: Launch of a popular digital currency leading to significant retail deposit withdrawals.

  2. Social Movement for Ethical Banking: Customers moving their deposits to more socially responsible institutions due to a social movement.

  3. Virtual Real Estate Investment in Metaverse: Shift of investment from physical to virtual real estate, affecting the mortgage market.

  4. Global Supply Chain Crisis: A supply chain crisis raising living costs, impacting employment and mortgage defaults.

  5. Radical Regulatory Changes: Overhaul of financial regulations impacting banking operations and customer behavior.

  6. AI-Driven Financial Planning Trend: AI advisors leading customers to diversify away from traditional savings, affecting deposits.

  7. Extraterrestrial Event Impacting Markets: Market volatility and erratic customer behavior triggered by an extraterrestrial event.

Each of these scenarios poses unique challenges and opportunities for testing the resilience and adaptability of your institution's liquidity and risk management strategies.

Me: Please provide a more detailed analysis of how Social Media-Driven Customer Behavior could affect us. In particular consider what could cause it, how it could unfold, the effect it could have on us and mitigating steps we could take now, or in the future should such an event happen.

GPT-4: Analysis of Social Media-Driven Customer Behavior Impact

Potential Causes

  1. Viral Misinformation or Negative Campaigns: False rumors or targeted negative campaigns about your institution's financial health, unethical practices, or customer service failures could go viral.

  2. Influencer Impact: Influential social media personalities could sway public opinion against your institution, either due to personal experiences, affiliations with competitors, or as part of a social cause.

  3. Customer Service Incidents: A small-scale customer service issue, if poorly handled and publicized online, could escalate rapidly in the social media ecosystem.

  4. Competitor's Positive Campaigns: Competitors might leverage social media effectively to highlight their strengths or innovations, indirectly casting a shadow on your offerings.

How It Could Unfold

  • Rapid Spread of Information: Social media accelerates information dissemination, with the potential to reach millions in a short span.

  • Echo Chambers: Information, whether true or false, tends to get amplified within social media echo chambers, reinforcing negative perceptions.

  • Mobilization of Public Sentiment: Social media can mobilize public sentiment quickly, leading to coordinated actions like account closures or protests.

  • Media Amplification: Traditional media might pick up on these social media trends, further amplifying the issue.

Potential Effects

  1. Run on Deposits: Widespread panic could lead to a significant number of customers withdrawing their deposits, straining liquidity.

  2. Damage to Brand and Reputation: Long-term damage to the institution's brand and reputation could deter potential customers and affect business growth.

  3. Reduced Investor Confidence: Shareholder and investor confidence could waver, affecting stock prices and future investment.

  4. Operational Disruption: Increased volume of inquiries and complaints could overwhelm customer service channels, leading to operational disruptions.

Mitigation Strategies

Current Measures
  1. Robust Social Media Monitoring: Implement comprehensive tools to monitor social media for mentions of your institution. Early detection is key.

  2. Crisis Communication Plan: Develop a crisis communication plan specifically for social media-driven events.

  3. Customer Service Excellence: Invest in exceptional customer service to prevent issues from escalating to social media complaints.

  4. Positive Brand Building: Regularly engage on social media with positive stories, customer testimonials, and transparency reports to build a reservoir of goodwill.

Responsive Actions During an Event
  1. Rapid Response Team: Have a dedicated team ready to respond quickly to misinformation or negative publicity on social media.

  2. Direct Customer Engagement: Engage directly with affected customers to resolve issues and demonstrate commitment to customer satisfaction.

  3. Collaboration with Influencers: Collaborate with respected influencers to counteract negative campaigns with factual information.

  4. Transparent Communication: Regularly update customers and the public with clear, transparent information about the situation.

Long-Term Strategic Measures
  1. Digital Literacy Campaigns: Educate customers about misinformation and digital literacy to build a more discerning customer base.

  2. Strengthening Online Presence: Develop a strong, positive online presence through regular, engaging content and community involvement.

  3. Liquidity Cushions: Maintain robust liquidity reserves to handle potential runs on the bank.

  4. Regular Simulations: Conduct regular simulations or drills for handling social media crises to ensure preparedness.

By proactively managing your social media presence and being prepared to respond effectively to any crises that arise from it, your institution can mitigate the risks associated with social media-driven customer behavior. This approach not only helps in managing immediate crises but also contributes to building long-term resilience and trust with your customer base.

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