Stress Tests Can Help Determine How Much Capital Central Banks Need

IMF Blog, September 19, 2025

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Central banks typically lack universally prescribed minimum capital requirements; they “can’t go bankrupt, because they can always issue their own currency to meet their nominal payment obligations.”
Historically, central banks had small balance sheets and were almost always profitable because currency paid zero interest and proceeds were invested in interest-bearing government bonds.
Large-scale asset purchases since the Global Financial Crisis and the pandemic have increased balance sheet risk and led to sizable losses when interest rates rose.

Many central bank bylaws set authorized capital as a fixed amount, which “loses relevance over time due to inflation.”
Only a few institutions adjust capital based on inflation or gross domestic product.
Legal rules on profit distribution are often mechanical and can produce too much or too little capital.
Observed legal targets for minimum capital vary a lot—from 8 percent to 20 percent of base money—and there is little explanation for these thresholds.
Some central banks lack specific rules on capital, leaving decisions to boards; central banks are generally reluctant to explain their approach publicly.

Objective: ensure capital cushions are consistent with “policy solvency”—the central bank’s ability to fulfill its mandate amid greater balance sheet risk.
Stress-testing should gauge the level of capital that allows absorption of large but plausible shocks without pushing capital to very low levels that could weaken credibility and independence.
Factors to consider: institutional objectives, activities, inflation, and broader economic dynamics and how these affect capital.

IMF staff developed a quantitative model building on 2015 research by Robert E. Hall and Ricardo Reis.
The model assesses capital evolution in a framework that accounts for:
- interest rate risk,
- credit risk,
- foreign exchange risk.
A stress test would simulate inflation and broad economic dynamics and their effects on capital.

Stress-testing can inform decisions on:
- when a capital increase through profit retention is warranted,
- when and how to share profits while protecting capital levels.
Central banks that perceive risk to credibility or independence may find a risk-based approach appealing.
Central banks that perceive little risk may retain current distribution policies but can use stress-testing to enhance transparency and public accountability.
Supervisory approaches used for private banks can sometimes inform central bank capital debates despite different public missions.

The IMF has published a guidance note on central bank stress-testing.
The IMF provides technical assistance on central bank stress-testing to member countries.

Romain Veyrune, September 19, 2025.