This story about the EU's treatment of software as regulatory capital is indicative of the dangers of allowing politics to play a role in financial regulation. Regulation needs to be focused on matters of financial risk. It's purpose is to manage that risk for the benefit of society as a whole. When regulation is skewed to political ends, someone risks paying the price at some point.
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Political regulation vs risk-based regulation
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Bank of England plans break from EU with tougher bank capital rule Five biggest UK lenders will suffer €3.6bn hit from proposed change to software treatment The Bank of England is preparing its first significant break from EU regulations with a proposal that would make bank capital rules tougher in the UK than on the continent. The European Banking Authority decided late last year that lenders should be able to count investment in software towards their core capital levels. For example, if a bank spends €100m on a new trading system, much of that can now be counted as loss-absorbent capital. But in a harsh verdict on the decision, the BoE’s Prudential Regulation Authority has said that it had “found no credible evidence that software assets can absorb losses effectively in stress” and is “therefore concerned . . . [the rule] could undermine the safety and soundness of UK firms”.
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