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    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.

     

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    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

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