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    EC Amends Rule on Deduction of Software Assets from CET1 Items

    December 22, 2020

    EC published the Delegated Regulation 2020/2176 that amends prudential requirements on deduction of software assets from the common equity tier (CET1) capital items of banks. EBA had been mandated, under the revised Capital Requirements Regulation (CRR2), to develop the draft regulatory technical standards to specify the application of deductions related to software assets from CET1 items. To ensure coherence of the provisions related to own funds and to facilitate their application, it is appropriate to incorporate these technical standards into Regulation 241/2014, which groups all technical standards concerning own funds. Therefore, Regulation 2020/2176 is amending Regulation 241/2014 and it shall enter into force on the day following that of its publication in the Official Journal of the European Union.

    CRR2 amended provisions of the treatment of prudently valued software assets to further support the transition toward a more digitalized banking sector. Due to the diversity in software used by institutions, it is difficult to assess, in a general way, which software assets could have a recoverable value in case of a resolution, insolvency, or liquidation and to what extent, or to identify a category of software that would preserve its value even in such a scenario. Given the limited value software assets appear to have in case of a resolution, insolvency, or liquidation of an institution, it is essential that the prudential treatment of such assets strikes an appropriate balance between prudential concerns and the value of those assets from a business and an economic perspective.

    The prudential treatment of software assets should thus entail a certain margin of conservatism on the relief in CET1 capital requirements. In addition, in order not to introduce additional operational burdens for the institutions and to facilitate supervision by the competent authorities, the prudential treatment of software assets should be simple to implement and applicable to all institutions in a standardized manner. The standardized prudential treatment should not prevent an institution from continuing to fully deduct its software assets from CET1 items. Given the rapid changes in technology, institutions often invest in maintenance, enhancements, or upgrades of their software. To mitigate any risk of regulatory arbitrage, those investments should be amortized separately from the software that is maintained, enhanced, or upgraded, provided that such investments are recognized as an intangible asset on the balance sheet of the institution under the applicable accounting framework. After considering these factors, Regulation 241/2014 has been amended by replacing point (f) in Article 1 and by adding Article 13a on the deduction of software assets that are classified as intangible assets for accounting purposes.

     

    Related Link: Regulation 2020/2176

     

    Keywords: Europe, EU, Banking, Software Assets, CRR2, Regulatory Capital, Basel, EBA

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