EC Amends Rule on Deduction of Software Assets from CET1 Items
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
ESAs Issue Multiple Regulatory Updates for Financial Sector Entities
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
EBA Finalizes Methodology for Stress Tests, Issues Other Updates
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
OSFI Sets Out Work Priorities and Reporting Updates for Banks
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
APRA Finalizes Changes to Capital Framework, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.
BIS Hub and Central Banks Conduct CBDC and DeFI Pilots
The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.
FASB Proposes Improvements to 2023 GAAP Reporting Taxonomy
The Financial Accounting Standards Board (FASB) is seeking comments, until November 03, 2022, on the proposed technical and other conforming improvements for the 2023 GAAP Financial Reporting Taxonomy.
ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations
The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.
ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector
Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)
