Each major financial crisis has prompted central banks to revise their policy frameworks, expanding the tools used to safeguard the economy.
The recent conflict involving Iran has raised a fundamental question for regulators: how far should a central bank intervene to shield the financial system from external shocks before such flexibility becomes a source of risk itself?
In response, the Bangko Sentral ng Pilipinas (BSP) issued a memorandum granting banks temporary relief from recognizing unrealized mark‑to‑market losses on peso‑denominated government securities classified as financial assets at fair value through other comprehensive income.
The nine‑month relief allows eligible institutions to exclude these valuation losses from their capital adequacy and common equity tier 1 ratios, with reporting requirements and eligibility criteria defined in the memorandum.
This measure builds on earlier supervisory actions taken after the declaration of a national energy emergency, which included loan restructuring, borrower relief, forbearance on loan classification, rediscounting support, operational flexibility, and reduced digital payment fees.
Together, these steps illustrate a shift from reliance solely on monetary policy toward a coordinated use of monetary, macroprudential, and supervisory instruments to preserve financial intermediation.
Since the Global Financial Crisis, regulators have increasingly adopted a counter‑cyclical stance, recognizing that rigid application of prudential standards during stress can amplify instability.
Regulatory discretion is commonly evaluated against four principles: necessity, proportionality, consistency, and a clear exit strategy.
Necessity is satisfied when intervention addresses systemic risk, as the Iran conflict generated heightened uncertainty through rising energy prices, inflation expectations, bond yields, and market volatility.
Proportionality requires that relief be narrowly targeted, transparent, and time‑bound; the BSP’s safeguards include defined eligibility, reporting obligations, and a fixed application period, though their sufficiency will be monitored.
Consistency demands that measures reinforce financial resilience; an earlier draft of the memorandum considered restricting cash dividends for institutions receiving relief, a provision that was omitted, prompting scrutiny of capital preservation objectives.
To ensure an exit strategy, the BSP stipulated that full recognition of unrealized losses must occur by January 2027, providing a clear timeline for returning to standard supervisory standards.
Moody’s has labeled the capital relief as credit‑negative, noting that excluding unrealized losses can obscure the true strength of banks’ capital ratios and may set expectations for future accommodations.
Critics warn that repeated reliance on such relief could erode market discipline, creating moral hazard if banks begin to factor anticipated regulatory support into their risk‑taking decisions.
Moral hazard emerges not from a single intervention but from the expectation that similar measures will be available in future crises, potentially weakening risk management and liquidity practices.
Modern central banks are judged on both price stability and financial stability, requiring discretionary tools while maintaining the credibility of the supervisory framework.
The ultimate test of the BSP’s approach will be its ability to restore full prudential discipline after the crisis while preserving system stability and market confidence.
