EUROPE – The European asset and investment fund management bodies EAMA and FEFSI have responded to a European Commission consultation paper on the treatment of losses.

The Commission sent out a consultation note on the revised proposals of the Basel Committee on Banking Supervision concerning the treatment of expected and unexpected losses in the proposed new capital requirements framework in November last year.

Under the modified Basel proposals, credit institutions and investment firms would be required to hold capital only against unexpected losses, the Commission said.

“We agree with this proposal as financial theory and industry practice clearly indicate that capital should be used for protection against unexpected (and uninsured) losses, whereas expected losses should be charged against income as incurred or via a provision,” the two bodies said in a letter to the Commission.

The letter, to Alexander Schaub, director general of the Commission’s DG Markt, was signed by European Asset Management Association acting secretary general Robin Clark and Steffen Matthias, secretary general of the Fédération Européenne des Fonds et Sociétés d'Investissement.

“Of course capital requirements should only be based on unexpected losses,” said internal markets commissioner Frits Bolkestein in a speech at the Centre for European Policy Studies in Brussels in November. “However, regulators have had justifiable doubts about the degree of coverage of expected losses in banks' provisioning.”

The EAMA and FEFSI are planning to hold extraordinary general meetings in the first half of February to approve their planned merger.