26 November 2003

Basel II: Consultation note on treatment of expected and unexpected losses

The Basel Committee has indicated its intention to amend the treatment of expected losses under the IRB approach of the proposed new capital framework. The Commission therefore published a consultation note on the revised proposals of the Basel Committee on Banking Supervision.

Under the proposed modification, capital will be required to be held only against unexpected losses.

Institutions will be required to deduct from the amount of capital they hold any shortfall in their total of general and specific provisions as compared with their expected loss figure. This amount shall be deducted 50% from Tier 1 capital and 50% from Tier 2 capital.

Where an institution has provisions in excess of expected loss, it is proposed that this excess can be recognised in Tier 2 capital up to a maximum of 20% of such capital. This would replace the current possibility to include general provisions up to 1.25% of risk-weighted assets in Tier 2 capital.

The Commission Services makes this note available to indicate their early orientation in relation to this development and to seek the views of interested parties.

The Commission is seeking comments by 31 December 2003.

Commission release

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