Wednesday 14 October 2020 4:15 pm

EU watchdog proposes software capital relief to increase banks’ safety buffers

The European banking watchdog has proposed allowing lenders to include the value of software investments in capital calculations, a move that could increase banks’ capital buffers by billions of euros. 

The European Banking Authority (EBA) said lenders will be allowed to “amortise” or taper the value of software for capital purposes over three years.

Read more: EU markets watchdog working on ‘Plan B’ to move euro clearing from London

Under current rules, eurozone banks must deduct the value of software investments such as cybersecurity from its capital buffer upfront, adding 36 basis points to its core ratio or mandatory measure of stability.

The proposed change marks a victory for banks, which have long argued that current rules put them off updating cybersecurity systems and innovating in digital services for customers.

Brussels had already agreed to soften the rule to help banks keep lending to pandemic-hit businesses, and the European Commission is expected to rubberstamp the EBA’s proposals for introduction this year.

Before the Open newsletter: Start your day with the City View podcast and key market data

The proposed rule change would boost capital by about €20.2bn (£18.2bn) this year across a sample of 64 banks, and by €20bn in 2021, the EBA said. 

“The proposed approach is designed to be simple to implement and applicable to all institutions in a standardised manner, as is the case today with the deduction treatment,” the regulator said. 

Read more: Bank of England asks UK banks about readiness for negative rates

“The existing approach also distorts the global playing field, particularly when compared to the US, where banks can treat software investments as tangible assets that do not have to be deducted from a bank’s capital ratio,” a spokesperson for the European Banking Federation said. 

UK banking regulators have previously cautioned against including the value of software investments in capital ratios, citing numerous high profile systems outages at banks.