Featured Product

    EBA Finalizes Standards for Prudential Treatment of Software Assets

    October 14, 2020

    EBA published the final draft regulatory technical standards specifying the methodology for prudential treatment of software assets by banks. The technical standards implement a simple approach based on a prudential amortization of software assets calibrated over a period of up to three years. These standards amend the Delegated Regulation 241/2014, which supplements the Capital Requirements Regulation (CRR), with regard to the regulatory technical standards for own funds requirements for institutions. Following the feedback received during the public consultation, the calibration of the maximum prudential amortization period of software has been extended to three years. In line with the recent targeted "quick fix" amendments to CRR, the date of entry into force of the draft standards has been anticipated to the day following that of its publication in the Official Journal of the European Union.

    As part of the Risk Reduction Measures package adopted by the European legislators, CRR has been amended. The package introduced, among other things, an exemption from the deduction of intangible assets from common equity tier 1 items for prudently valued software assets, the value of which is not negatively affected by resolution, insolvency, or liquidation of an institution. EBA had been mandated to develop draft regulatory technical standards to specify how this provision shall be applied. In the opinion of EBA, a prudential treatment of software assets based on their amortization for prudential purposes is deemed to strike an appropriate balance between the need to maintain a certain margin of conservatism in the treatment of software assets as intangibles and their relevance from a business and an economic perspective. In addition, it reflects the pattern under which the recoverable value of software is expected to decrease over time.

    The proposed approach is designed to be simple to implement and is applicable to all institutions in a standardized manner. Based on the feedback received from stakeholders, EBA has calibrated the proposed approach on a three-year timeframe. Moreover, the final draft standards have been revised to envisage that prudential amortization shall be calculated starting from the date on which a software asset is available for use. This would result in a better alignment between the starting date of the accounting and the prudential amortization, thus facilitating the implementation of the new prudential treatment of software. EBA intends to closely monitor the evolution of the investments in software assets going forward, including the link between the proposed prudential treatment and the need for EU institutions to make some necessary investments in IT developments in areas such as cyber risk or digitalization.

    As part of its mandate, EBA investigated the quantitative and qualitative aspects related to the amount of software assets held by EU institutions, their valuation and expected useful life, and amortization methodology (particularly in the case of resolution, insolvency, or liquidation) as well as the implications of a change in the regulatory treatment. In developing these draft technical standards, consideration has been given to the differences in valuation and amortization of software assets and to the value realized from their sale. EBA has also considered the international developments and differences in regulatory treatment of investments in software, the different prudential rules that apply to insurance undertakings, and the diversity of the financial sector in EU, including non‐regulated entities such as financial technology companies. The final standards have been sent to EC for their adoption as EU Regulations that will be directly applicable throughout EU.

     

    Related Links

    Effective Date: OJ+1 Day

    Keywords: Europe, EU, Banking, Software Assets, Regulatory Technical Standards, Prudential Treatment, CRR, Cyber Risk, Own Funds, Regulatory Capital, Regulatory Capital, Basel, EBA

    Featured Experts
    Related Articles
    News

    PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK

    PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.

    April 15, 2021 WebPage Regulatory News
    News

    EBA Finalizes Standards on Methods of Prudential Consolidation

    EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).

    April 15, 2021 WebPage Regulatory News
    News

    EBA Updates List of Other Systemically Important Institutions in EU

    EBA updated the list of other systemically important institutions (O-SIIs) in EU.

    April 15, 2021 WebPage Regulatory News
    News

    BCBS Report Concludes Basel Risk Categories Can Capture Climate Risks

    BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.

    April 14, 2021 WebPage Regulatory News
    News

    UK Authorities Welcome FSB Review of their Remuneration Regime

    UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.

    April 14, 2021 WebPage Regulatory News
    News

    PRA and FCA Letter on Addressing Risks from Use of Deposit Aggregators

    PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.

    April 14, 2021 WebPage Regulatory News
    News

    MFSA to Amend Banking Act and Rules in Coming Months to Transpose CRD5

    MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.

    April 14, 2021 WebPage Regulatory News
    News

    EC Delegated Regulation on Specialized Lending Exposures Under CRR

    EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.

    April 14, 2021 WebPage Regulatory News
    News

    OSFI Proposes to Enhance Assurance Expectations for Basel Returns

    OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.

    April 13, 2021 WebPage Regulatory News
    News

    ECB Issues Results of Benchmarking Analysis of Recovery Plans of Banks

    ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.

    April 13, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6858