SBP Issues AFS/FVOCI Guidelines for Basel III

Karachi: The State Bank of Pakistan (SBP) has rolled out fresh guidelines for banks and Development Finance Institutions (DFIs), clarifying the regulatory treatment of Available-for-Sale (AFS) and Fair Value through Other Comprehensive Income (FVOCI) portfolios under the Basel III Capital Adequacy Framework, a decisive step toward financial stability. Issued this week, the central bank’s circular aligns Capital Adequacy Ratio (CAR) calculations with prior directives, including BSD Circular No. 8 of 2006, updated frequently asked questions (FAQs), and a Pakistan Banks Association (PBA) letter dated July 2, 2024.

Recognizing the significant impact on financial institutions’ capital positions, the SBP has introduced a phased transition mechanism for reclassifying FVOCI portfolios from the Banking Book to the Trading Book: 25% by December 2025, 50% by December 2026, and 100% by December 2027. Banks and DFIs may accelerate this process but must not fall below these minimum thresholds. Non-compliance risks penal action under applicable laws, with all prior AFS/FVOCI instructions remaining intact.

Institutions are required to acknowledge receipt and ensure full compliance, a move seen as part of the SBP’s broader push for risk sensitivity and transparency in Pakistan’s banking system. Web context highlights ongoing Basel III adoption challenges, while posts found on X show mixed reactions—some welcome the clarity, others fear capital strain. Critically, the narrative of “enhanced transparency” may downplay practical hurdles—web sources note portfolio reclassification complexities, and X sentiment suggests compliance concerns, pointing to potential disruptions.