FBE comments on the Basel Committee's proposed treatment of expected and unexpected losses

12 December 2003

The European Banking Federation (FBE) supports in principle a separation of the treatment of expected and unexpected losses.

The FBE is concerned about the impact of accounting rules on bank provisioning. Accounting rules require banks to charge provisions as an expense to the profit and loss account. If provisions fell short of expected losses, the Committee’s proposal would allow the shortfall to be deducted 50% from Tier 1 capital and 50% from Tier 2. The FBE is concerned that as yet no one has a clear understanding of how this will interact with the provisioning rules in IAS 39.

Of particular concern is the impact of the proposal on banks on the Foundation IRB Approach which will be required to use the definitions of Loss Given Default (LGD) and Exposure at Default (EAD). These definitions will not be reflected in the accounting definition of provisioning provided by the IASB. This will result in an inappropriate reduction in the level of surplus provisions included in capital or an excessive deduction for a provision shortfall.

FBE paper

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