Banks will be allowed to temporarily exclude valuation losses on government securities (GS) from their capital calculations after the Bangko Sentral ng Pilipinas (BSP) approved a regulatory relief measure in a bid to mitigate the financial impact of the ongoing Middle East conflict.

In a memorandum issued last Friday, June 19, the BSP said that the Monetary Board (MB) approved the “regulatory relief measure on net unrealized losses on peso GS under the fair value through other comprehensive income (FVOCI) portfolio incurred after the start of the [war].”

This intervention, the BSP said, was necessary because geopolitical tensions have pressured the local debt market. “This relief is afforded in view of the impact of the Middle East conflict on market yields and asset valuations,” BSP Governor Eli M. Remolona Jr. said.

Under the new guidelines, banks and quasi-banks (QBs) are permitted to adjust the computation of their capital adequacy ratio (CAR) and common equity tier (CET) 1 ratio.

Banks will be allowed to exclude from their CET1 capital calculations the cumulative unrealized losses on peso-denominated GS classified under the FVOCI portfolio that were incurred after the start of the United States (US)-Iran war.

According to the BSP, the baseline for this relief is Feb. 28, when the Middle East conflict flared up.

For lenders that already recorded net unrealized losses on that date, they are instructed not to “include cumulative losses exceeding the said amount in computing the two capital ratios during the relief period.”

Conversely, those that held net unrealized gains as of the February baseline will be allowed to ignore all subsequent unrealized losses on their FVOCI peso GS portfolio when calculating CET1 capital.

Even with the capital calculation leeway, the BSP stressed that transparency must be maintained in general accounting.

“It is understood that the banks or QBs shall continue to report actual unrealized FVOCI losses in all other financial reports,” the BSP clarified, adding that realized and impairment losses must still be reported in full.

According to the memorandum, the regulatory relief is scheduled to apply from April 1 to Dec. 31, 2026, with the BSP allowing retroactive application to the April and May 2026 capital figures.

Lenders intending to avail themselves of the relief must notify their respective supervising departments by June 30.

To prevent misuse of the relief measure, the BSP said it will closely monitor additional investments that participating banks and QBs book under their FVOCI accounts during the covered period. The BSP may also restrict access to certain BSP liquidity facilities if necessary.