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    EBA Consults on Standards for Prudential Treatment of Software Assets

    June 09, 2020

    EBA proposed regulatory technical standards specifying the methodology for prudential treatment of software assets, with the consultation period ending on July 09, 2020. The draft standards introduce a prudential treatment based on the amortization of software assets. The proposed standards amend the Delegated Regulation 241/2014, which supplements the Capital Requirements Regulation, with regard to the regulatory technical standards for Own Funds requirements for institutions. The final regulatory standards will be submitted to EC for adoption, before being published in the Official Journal of European Union.

    As part of the Risk Reduction Measures package adopted by the European legislators, the Capital Requirements Regulation 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 the institution. EBA has been mandated to develop draft regulatory technical standards to specify how this provision shall be applied. Article 36(4) of the Capital Requirements Regulation mandates EBA to specify the application of certain deductions, including the materiality of negative effects on the value, that do not cause prudential concerns. 

    The draft regulatory technical standards introduce prudential treatment based on the amortization of software assets. This treatment 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 expected to be easy to implement and applicable to all institutions in a standardized manner. Considering the interplay between the accounting and prudential framework, this consultation also highlights a number of areas where close scrutiny will be warranted by regulators, supervisors, and external auditors, as a change in the current treatment will likely influence the accounting treatment of software assets. 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 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 case of resolution, insolvency, or liquidation—as well as implications stemming from a change of the current regulatory treatment. While developing these draft regulatory technical standards, consideration was given to the differences in valuation and amortization of software assets and to the value realized from their sale; the international developments and the differences in the 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.

     

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    Comment Due Date: July 09, 2020

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

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