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    PRA Sets Out Stance on Prudential Treatment of Software Assets

    December 30, 2020

    PRA published a statement that highlights its intent to consult on the prudential treatment of software assets. PRA confirmed that it intends to maintain a position whereby all software assets continue to be fully deducted from the common equity tier 1 (CET1) capital. Following publication of EC Regulation 2020/2176 on the prudential treatment of software assets, the requirements in Article 36(1)(b) of the amended Capital Requirements Regulation (CRR2) became effective on December 23, 2020. Article 36(1)(b) of CRR2 exempts software assets from the deduction requirement for intangible assets from CET1.

    In accordance with the European Union (Withdrawal Agreement) Act 2020, this requirement now applies to the PRA-regulated firms. As noted in a PRA statement on June 30, 2020, this revised regulatory treatment of software assets does not derive from the Basel Standards and is specific to CRR. PRA has looked for evidence for realizable or recoverable value of software assets in liquidation or in stress, including drawing on information from firms, and found no credible evidence that software assets can absorb losses effectively in stress. PRA is, therefore, concerned that exempting software assets from the CET1 capital deduction requirements could undermine the safety and soundness of UK firms.

    In due course, PRA intends to consult to maintain the earlier position whereby all software assets continue to be fully deducted from CET1 capital. PRA does not normally pre-announce its intended approach for forthcoming consultation. However, in this case, PRA considered it appropriate to inform firms of its intention in advance, so they can take this into account when making capital management and other decisions that may be impacted by this change. While the revised EU requirement now applies to PRA-regulated firms, PRA recommends that firms should not base their distribution or lending decisions on any capital increase from applying this requirement. Firms should also take into account any significant software assets included in their regulatory capital in making capital management decisions.

     

    Related Link: Statement

     

    Keywords: Europe, EU, UK, Banking, Software Assets, CRR2, Regulatory Capital, Basel, EC, PRA

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