The Bangko Sentral ng Pilipinas issued Memorandum No. M-2026-027 allowing Philippine banks and quasi-banks to temporarily exclude unrealized losses on peso government securities from regulatory capital computations from April 1 to December 31, 2026. The relief measure responds to market volatility triggered by the Middle East conflict, which pushed up yields and lowered bond values. Philippine banks hold government securities accounting for about 30% of banking system assets as of March, with around 40% of those holdings classified under fair value through other comprehensive income, making them exposed to mark-to-market treatment that can pressure capital ratios during market swings.
BSP Memorandum No. M-2026-027 Provides Capital Relief Through Year-End
The BSP relief applies to government securities booked under fair value through other comprehensive income. These are securities that banks have not sold, but whose changing market value affects the bank's capital. The measure cushions the impact of market conditions that have rattled financial markets, pushed up yields, and consequently lowered the value of some bond holdings. When yields rise, bond prices usually fall.
The relief runs from April 1 to December 31, 2026. Beginning January 2027, the usual capital rules will again apply. The BSP is allowing banks to exclude some paper losses caused by market swings when computing key capital ratios. These ratios measure how much financial cushion a bank has to absorb losses.
The BSP said the goal of the new policy is to prevent "transitory market movements from unduly affecting the reported capital strength of banks and quasi-banks."
Paper Losses Reflect Market Value Declines Without Asset Sales
Paper losses happen when the market value of an asset falls, but the bank has not actually sold the asset. For example, a bank may hold a government bond that it bought at a certain price. If interest rates rise, or if investors demand higher returns because of war, oil price spikes, inflation, or uncertainty, the market price of that bond falls.
The bank now has a paper loss because the bond is worth less in the market. But if the bank does not sell the bond and the government continues paying as promised, the bank may still recover the full value when the bond matures. If a bank faces a liquidity crunch and has to sell the bond, then those paper losses become real losses.
When capital ratios fall, banks are supposed to become more conservative. They may slow lending, sell assets, preserve cash, or delay expansion. That is the outcome the BSP appears to be trying to avoid, especially if the losses are mainly the result of temporary market volatility rather than actual weakness in the banks' assets.
Former BSP Deputy Governor Warns of Moral Hazard Risk
Former BSP deputy governor Diwa Guinigundo raised concerns about moral hazard. Writing for the geopolitical research analysis firm GlobalSource Partners, Guinigundo said: "The BSP's policy choice nevertheless raises legitimate policy questions. Regulatory relief inevitably creates some degree of moral hazard. Borrowers may expect future payment relief during external shocks, while banks may become less disciplined in recognizing emerging credit risks or strengthening capital buffers if regulatory forbearance is perceived as readily available. Prolonged or repeated relief could also delay the recognition of problem assets, distort credit allocation, and weaken market discipline."
Capital rules exist to incentivize banks to self-regulate and err on the side of caution. If paper losses reduce capital, they nudge banks to manage interest rate risk carefully. By temporarily removing that capital hit, regulators may weaken that discipline. Banks may become less cautious if they expect relief whenever markets move against them.
Moody's Labels Relief Credit Negative Amid High Government Securities Exposure
Moody's Ratings said government securities accounted for about 30% of banking system assets as of March, among the highest shares in Asia. Around 40% of those holdings were classified as FVOCI, meaning they are exposed to mark-to-market treatment.
"The increase in government bond yields has pressured Philippine banks' capital ratios because they hold a large number of long-duration government securities," Moody's said.
According to Moody's, unrealized losses ranged from 1.2% to 4.3% of CET1 capital in the first quarter of 2026, while cumulative unrealized losses on CET1 capital ranged from 1.3% to 7.5%. Common Equity Tier 1, or CET1, is the strongest form of bank capital and the first line of defense against losses.
Moody's called the BSP relief "credit negative," because it shields capital ratios from the impact of higher bond yields. Fitch Ratings has downgraded its 2026 outlook for the Philippine banking sector from "neutral" to "deteriorating," citing the risk of higher credit impairments, slower loan growth, and weaker profitability.
BSP Confirms Monitoring and Safeguards Remain in Place
The BSP has safeguards in place even with the temporary relief extended. Banks must still recognize and report their losses in financial reports and financial statements. The BSP also said it will monitor additional government securities booked under FVOCI accounts by banks that use the relief. It may also limit their access to select BSP liquidity facilities.
The BSP released a statement on Friday, June 26 assuring that it was monitoring risks. "Philippine banks remain well positioned to withstand potential shocks, supported by ample liquidity, adequate capital buffers, and manageable asset quality. While some pressure may emerge in specific borrower segments, risks remain contained, with no evidence of broad-based deterioration," the central bank said.
"The BSP expects banks to maintain prudent credit standards, adequate provisioning, strong governance, and sufficient capital and liquidity buffers. The BSP stands ready to take appropriate supervisory action, as needed, to preserve financial stability and protect the public."
FAQ
What did the BSP do regarding bank capital computations?
The Bangko Sentral ng Pilipinas issued Memorandum No. M-2026-027 allowing Philippine banks and quasi-banks to temporarily exclude unrealized losses on peso government securities from regulatory capital computations from April 1 to December 31, 2026. The relief applies to government securities booked under fair value through other comprehensive income.
Why did the BSP grant this temporary relief to banks?
The relief measure responds to market volatility triggered by the Middle East conflict, which pushed up yields and lowered bond values. The BSP said the goal is to prevent "transitory market movements from unduly affecting the reported capital strength of banks and quasi-banks."
What concerns did former BSP deputy governor Diwa Guinigundo raise about the relief measure?
Guinigundo warned that regulatory relief inevitably creates some degree of moral hazard. He said borrowers may expect future payment relief during external shocks, while banks may become less disciplined in recognizing emerging credit risks or strengthening capital buffers if regulatory forbearance is perceived as readily available.
