The Customer Owned Banking Association will continue to agitate for changes to the regulatory treatment of investments in information technology and software after APRA rejected industry calls to relax its capital rules.
Banks and other ADIs are required to deduct expenditure on software investments from CET 1 capital under rules first established by the Basel Committee because they are classified as intangible assets.
In a response to industry submissions on proposed changes to the measurement of regulatory capital released on Monday, APRA said it would not be amending the deduction rule because intangible assets such as capitalised software expenses were likely to have limited value in the event of an institution becoming insolvent.
“APRA does not consider it prudent to include these assets within CET1 capital,” the regulator stated.
“A deduction approach to intangible assets provides a prudent reflection of the capital that would be available in stressed conditions.”
COBA has been lobbying the regulator to lighten the deduction arguing that it was “a punitive capital treatment” that created a disincentive for banks to invest in making their systems more resilient.
“Everything a bank does is now dependent on its software…the requirement to deduct these expenses from capital suggests there is no value in these assets,” COBA said in a submission to APRA last year.
“However, this is not correct as this software is essential to the operation of the bank, and arguably has significantly more value than any of the bank’s physical assets.”
While APRA accepted the argument that technology investment contributed to resilience of banks and the system as whole, the regulator maintains that assets such as capitalised software “can automatically lose their value” when an ADI faces the threat of insolvency.
COBA chief executive Mike Lawrence said yesterday his organisation would continue to push for changes to the deduction that results in ADIs losing about a dollar of regulatory capital for each dollar they invest in new technology.
“We are pleased that APRA agrees with our view that investment in technology can support an ADI’s long-term resilience,” Lawrence said.
“It is disappointing that APRA is unwilling at this stage to move to a less punitive regulatory capital treatment of such investment.
“While this is not the response we were looking for, we will continue to work with APRA to consider incentives, such as those seen in the European Union, to support technologyinvestment in the ADI sector.
“Many mutual ADIs are increasing their technology investment to undertake digitaltransformations.”
A fractious international debate on the merits of the deduction erupted last year after the European Banking Authority introduced new standards to reduce the deduction from regulatory capital of software investments by banks.
“As the banking sector is moving towards a more digital environment, the aim…is to replace the current upfront full deduction prudential regime so as to strike an appropriate balance between the need to maintain sufficient conservatism in the prudential treatment of software assets and their relevance from a business and an economic perspective,” the EBA said in a statement in October.
However, in December the Bank of England’s Prudential Regulatory Authority (PRA) urged