Impact of Software Expenses on Financial Statements and Capital Ratios in the Financial Sector Empirical : Evidence from Germany and Austria

In a world of digital technologies, software solutions become increasingly important for financial institutions and the amount of expenses for intangible assets are increasing. However, expenses for digital financial technologies are capitalized only if the requirements of the International Financial Reporting Standards (IFRS) are met. Even if the expenses for digital financial technologies are capitalized, for calculating Key Performance Indicators (KPIs) under the Capital Requirements Regulation (575/2013) (CRR), the capitalized intangible assets must be deducted from Common Equity Tier 1 (CET1) capital as a prudential filter. This deduction leads to a reduction of capital ratios and therefore to a disadvantage for financial institutions with investments in software solutions. In June 2019, the European Parliament amended regulations of CRR so that in the future capitalized software as intangible assets will not be deducted from the CET1 capital. This paper examines the impact of this amendment on the capital ratios of German and Austrian firms classified as other-systemically important institutions (O-SIIs). The paper shows the growing relevance of software capitalization in the financial sector. However, based on the 2018 data, the impact of the amendment on capital ratios is not material for German and Austrian financial institutions