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Spanish Association of Savings and Retail Banks (CECA)

The credit institutions represented through CECA apply IFRS in their financial statements or local GAAP, which does not differ from IFRS in the context of the recognition, measurement and amortization of intangibles assets. According to these accounting frameworks, credit institutions should assess IT cash outflows in order to give them an appropriate accounting treatment, either by recognizing an intangible asset, tangible asset, prepaid expense or directly recognizing an expense in PL. Up to date, this criteria has been applied, shared and reviewed by their auditors and supervisors and has not lead to any particular concern.
We note that in case credit institutions classify software assets within tangible assets, the percentage of this classification is less than 10% compared with the classification as intangible.
We welcome the option proposed in the consultation paper: the prudential amortisation of software assets. It appears to be clear and relatively easy to implement. However, the period proposed for the prudential amortisation is extremely short, in comparison to the useful life of the software, which in our opinion should be also considered to set a reasonable prudential amortisation period, even in resolution. (See answer to Question 3). Such a short amortisation period reduces significantly the potential benefit of the measure. On one hand, it reduces banks incentives to invest in software and keep up with the needed digital transformation. On the other, it raises several level playing field concerns.
Indeed, some credit institutions consider that the potential benefits of adopting this approach may not compensate its implementation costs and, therefore, they are contemplating not to make use of the exemption to deduct the software from their CET1. This situation may lead to an undesirable structural scenario which de facto would result in an unlevel playing field among EU banks.
Furthermore, the approach does not solve the unlevel playing field problem with international competitor banks. Whilst EBA’s draft RTS provides some relief when it comes to capital treatment of software, it is still too restrictive in comparison with the US/Swiss Model (where 100% recognition and 0% deduction is foreseen).
One of the main arguments used by EBA to set the prudential amortisation period at 2 years is that if an entity enters in merger/acquisition, resolution or liquidation, software assets of the bank will lose their value. That is derived from evidence collected by EBA in the impact assessment on software assets on a sample of 64 EU institutions as an extension of the BCBS QIS. We would like to highlight some concerns regarding this analysis, the sample used and the extrapolation of its conclusions to the entire European banking sector.

In the first place, it must be noted the key role of the resolution strategy in determining the prudential amortisation period for software assets. In Europe, open bank bail-in is the dominant resolution strategy when assessed it terms of banking assets. In an open bail-in resolution strategy the default presumption is that the software will remain operative after resolution and, consequently, it would not be amortised. In this case, the prudential amortisation period should be equivalent to the accounting amortisation period and the approach followed by EBA clearly underestimates it.

We also have doubts on the conclusions of the EBA assessment in case of the combination of bail-in with other resolution strategies different from open bank- bail-in. Indeed, EBA assessment does not reflect other feasible outcomes from resolution/absorption cases where the absorbed entity continues operating with its own software. This would be likely the case if we start to observe cross border operations and has been the case in other circumstances.

Based on these arguments, assuming a 2 years period may underestimate the software in case of resolution.

Additionally, it should be noted that an extended amortization period would reduce the time gap with the useful life of software, which is considerably longer. For example, among our members we observe cases where average useful life is calculated around 10/11 years and even up to 14 years in the case of critical software assets.

On the other hand, in our opinion the representativeness of the sample used is not good enough to extrapolate the results to the whole EU banking industry, if we consider that just around half institutions provided relevant information on the amortisation period, according to EBA. In addition, QIS instructions were not well understood and applied by institutions, and information provided by them was partial. This calls into question the quality of the data used for EBA’s assessment. Moreover the impact assessment was made on both bought/absorbed institutions, usually the weakest ones, which underestimates the value of the software in case of resolution and does not allow to capture properly the idiosyncrasy of the preferred resolution strategy for a large part of significant institutions in the Banking Union: open bank bail-in.

Finally, as mentioned in Q2, in case the prudential amortisation period is not extended, applying this treatment could have very little benefits when compared to the cost of its implementation for some credit institutions which may prefer to have the option of not applying the exemption to deduct the software from their CET1.

Considering all the issues raised and EBA’s average observed life our proposal is to set the prudential amortisation period at 6 years.
In a growing digital banking environment, it is crucial to facilitate and incentivise banking software development and acquisition in the UE by introducing a more favourable capital treatment of software assets. By doing so, the playing field will be levelled with respect to non-EU banks and FinTechs.
Furthermore, in view of the unintended consequences mentioned in question 3 that may arise from adopting an approach that is not sufficiently efficient in terms of cost-benefit for some entities, it becomes imperative to extend the prudential amortization period to align incentives and favour its adoption.
We think the treatment provided in Option B is more feasible in term of implementation, i.e. prudential amortisation when the software begins to be used and, thus, the accounting amortisation. It could be argued that Option A might has some more upsides in the short term, however, in the medium-long term no significant differences would be observed. Moreover, Option A may present some implementation challenges due to the different types of software accounting used by different institutions.
According to Article 2, the RTS shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. However, it would be preferable that the RTS enter into force on the day following its publication in the OJ. It would follow the aim of the CRR Quick Fix allowing banks to apply the exemption as early as possible.
Spanish Association of Savings and Retail Banks (CECA)