SBP Directs Banks to Implement Basel III Phase II Reforms

SBP Introduces Basel III Phase II Reforms

Strengthening Pakistan’s Banking Sector

The State Bank of Pakistan (SBP) has directed all commercial banks to implement Phase II of Basel III reforms. These reforms aim to improve risk management, enhance financial stability, and make banks more resilient against future crises.

The Basel III framework was introduced globally after the 2008 financial crisis exposed major weaknesses in the banking system. Pakistan has already implemented Phase I, which focused on capital adequacy, liquidity, and leverage ratios. Now, Phase II will address risk-weighting, leverage ratio improvements, and other advanced measures.

Key Instructions for Banks

SBP has issued new guidelines for banks to follow:

Credit Ratings: Banks must use credit ratings only from agencies recognized by the SBP. They cannot switch ratings to suit their needs.

Risk Weighting:

0% risk weight will apply to cash, prize bonds, and gold bullion.

20% risk weight will apply to cash items in the collection process.

Claims on the Government of Pakistan and SBP in PKR will have 0% risk weight.

Foreign currency claims will depend on international credit ratings.

Policies & Controls: Banks must have proper internal systems to ensure accurate risk assessment and demonstrate compliance to SBP.

Timeline for Implementation

The new rules will be applied on a parallel-run basis from September 30, 2025, to June 30, 2026. During this time, banks will submit returns under both the existing and revised instructions. This will help SBP identify challenges and make adjustments before full implementation.

Why This Matters

By enforcing Basel III Phase II, SBP aims to ensure that Pakistani banks remain strong, transparent, and capable of handling financial shocks. This step will also boost international confidence in Pakistan’s banking system.

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