## Stress Tests Can Help Determine How Much Capital Central Banks Need

_IMF Blog, September 19, 2025_

## Source details

**Canonical URL:** [Stress Tests Can Help Determine How Much Capital Central Banks Need](https://www.imf.org/en/blogs/articles/2025/09/19/stress-tests-can-help-determine-how-much-capital-central-banks-need)

## Other formats

- [Markdown version](/en/blogs/articles/2025/09/19/stress-tests-can-help-determine-how-much-capital-central-banks-need/index.md)
- [Structured JSON version](/en/blogs/articles/2025/09/19/stress-tests-can-help-determine-how-much-capital-central-banks-need/index.json)
- [Bundle manifest](/en/blogs/articles/2025/09/19/stress-tests-can-help-determine-how-much-capital-central-banks-need/bundle-manifest.json)

## Bibliographic details
- Authors: Romain Veyrune
- Published: September 19, 2025

---

### Background and motivation
- 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.

### Shortcomings of current capital frameworks
- 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.

### Proposed approach: stress-testing for “policy solvency”
- 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.

### Quantitative model and methodology
- 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.

### Policy implications and use cases
- 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.

### IMF activities
- 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.*

---


## References

- [guidance note](https://www.imf.org/en/Publications/Policy-Papers/Issues/2024/12/23/Central-Bank-Stress-Testing-Guidance-Note-559990)
- [technical assistance](https://www.imf.org/en/Publications/technical-assistance-reports/Issues/2025/05/07/South-Africa-Technical-Assistance-Report-Stress-Testing-the-Central-Bank-Balance-Sheet-and-566727)

_Source: https://www.imf.org/en/blogs/articles/2025/09/19/stress-tests-can-help-determine-how-much-capital-central-banks-need_