PRA statement on the EU requirement on prudential treatment of software assets

Following the publication of the European Commission Delegated Regulation (2020/2176) (the Regulation) in the EU Official Journal on Tuesday 22 December 2020 (which adopts the European Banking Authority Regulatory Technical Standards on the prudential treatment of software assets), the requirements in Article 36(1)(b) of the amended Capital Requirements Regulation (CRR II) become effective on Wednesday 23 December 2020.
Published on 30 December 2020

CRR Article 36(1)(b) exempts software assets from the deduction requirement for intangible assets from Common Equity Tier 1 (CET1), as set out in the Regulation. In accordance with the European Union (Withdrawal Agreement) Act 2020, this requirement now applies to PRA-regulated firms. 

As noted in a PRA statement on Tuesday 30 June 2020, this revised regulatory treatment of software assets does not derive from the Basel Standards and is specific to the CRR. 

The PRA has looked for evidence for realisable 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. The PRA is therefore concerned that exempting software assets from the CET1 capital deduction requirements could undermine the safety and soundness of UK firms. 

As set out in The PRA’s approach to banking supervision, firms should maintain appropriate capital resources, in terms of both quantity and quality, at all times. Having enough capital of sufficiently high quality reduces the risk of a firm becoming unable to meet the claims of its creditors, and is therefore crucial for maintaining creditor confidence. 

The PRA intends to consult in due course to maintain the earlier position whereby all software assets continue to be fully deducted from CET1 capital. The PRA does not normally pre-announce its intended approach for forthcoming consultation. But, in this case, the PRA considered it would be appropriate to inform firms of the PRA’s intention in advance, so they can take this into account when making capital management and other decisions which may be impacted by this change.

In the meantime, while the revised EU requirement now applies to PRA-regulated firms, the PRA recommends firms not to 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.

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