KARACHI: The State Bank of Pakistan (SBP) has issued fresh guidelines to banks and Development Finance Institutions (DFIs) clarifying the regulatory treatment of Available-for-Sale (AFS) or Fair Value through Other Comprehensive Income (FVOCI) portfolios under the Basel III Capital Adequacy Framework.
The central bank’s circular, issued this week, seeks to align CAR (Capital Adequacy Ratio) calculations with earlier communications including BSD Circular No. 8 of 2006, an updated set of frequently asked questions (FAQs), and a Pakistan Banks Association (PBA) letter dated July 2, 2024.
Acknowledging the material impact of these changes on financial institutions’ capital positions, the SBP has introduced a phased transition mechanism. This will allow institutions to gradually reclassify their FVOCI portfolios from the Banking Book to the Trading Book in line with the following minimum thresholds:
By December 2025: at least 25% of the FVOCI portfolio must be shifted to the Trading Book
By December 2026: 50% minimum
By December 2027: full reclassification (100%)
Banks and DFIs may choose to expedite this process and reclassify their holdings earlier, but they are not permitted to fall below the specified minimum thresholds in any of the defined periods.
The SBP has also cautioned that any failure to comply with the new reclassification schedule may attract penal action under applicable laws and regulatory provisions. All other previously issued instructions related to AFS/FVOCI treatment remain unchanged.
Institutions have been asked to acknowledge receipt of the circular and ensure full compliance with the transition plan. The move is seen as part of the central bank’s broader efforts to enhance risk sensitivity and transparency within the capital adequacy framework for Pakistan’s banking system.
