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
Previous ArticlePRA Sets Out Stance on Prudential Treatment of Software Assets
BIS Innovation Hub published the work program for 2021, with focus on suptech and regtech, next-generation financial market infrastructure, central bank digital currencies, open finance, green finance, and cyber security.
In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union.
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.