PRA Sets Out Stance on Prudential Treatment of Software Assets
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
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
Previous Article
HKMA Retains List of Designated D-SIBs Announced in December 2019Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.