It appears that the Australian Prudential Regulation Authority is hardening up its approach to the prudential treatment of capitalised software costs and it's bad news for banks such as National Australia Bank, Westpac and ANZ.In an email to banks and insurers on Monday, APRA confirmed it is proposing to deduct from Tier 1 capital any capitalised software classified as intangible assets under new international accounting standards, in line with "emerging international practice in this area."Under the Australian equivalents to International Financial Reporting Standards capitalised software that is "integral to hardware" is to be treated as a fixed asset, while that which is not "integral to hardware" is to be treated as an intangible asset.Last November, APRA sought clarification from Urgent Issues Group of the Australian Accounting Standards Board and the group has now told APRA that the standards do not require any additional clarification.In effect, application software developed internally by banks is not integral to hardware and is therefore an intangible asset under the new rules.Dismissing representations from the major banks, APRA says the principle that intangible assets are not readily available to absorb losses, and to protect depositors should a bank collapse, has long been endorsed by the Basel Committee on Banking Supervision and "against this background, APRA does not see a convincing case to take a different view of capitalised software development costs than that of the accounting standards."Estimates by Deutsche Bank quoted in yesterday's Financial Review show that NAB would be the most affected by this ruling, with $614 million of capitalised software currently in its balance sheet to be deducted from its Tier 1 capital.The bank is already operating under a higher capital ratio than its competitors due to its failure to fix a series of risk and other management problems arising from its currency options trading scandal over two years ago.Westpac has capitalised $447 million of software costs, followed by ANZ with $381 million and CBA with $182 million.Among the regionals, St George has $110 million and Bank of Queensland $85 million, while Adelaide Bank and Bendigo Bank have nothing or negligible amounts on their books.APRA has given banks and insurers until the end of this month to comment on its proposal, but the writing now looks to be pretty much on the wall.