Small Domestic Deposit Takers (SDDT) Regime

Senior management should focus on 3 areas when considering if the SDDT Regime makes sense for their institution:

• Quantify the impact of the SDDT Regime on their capital and liquidity requirements. While the liquidity guidance has already been published firms should wait until capital guidance (expected Q3 2024) is out before making a final decision on whether to enter the SDDT Regime.
• Firms should review how SDDT will impact key prudential documentation regulatory returns. Firms should prioritise understanding the benefit of simplification to the NSFR and ALMM returns, Pillar 3 disclosures, ILAAP and potentially ICAAP.
• Firms will also need to assess the impact of the reforms on Strategy, Policies and Procedures. For example, if your firm is considering applying for IRB models permissions, which are not allowed under the SDDT Regime, it may make sense to not apply for SDDT, despite being eligible.

The SDDT Regime can be an attractive alternative to small eligible banks as it offers the following benefits:

• Increased competitiveness: From a liquidity perspective, the SDDT Regime introduces the Retail Deposit Ratio (RDR) which aligns better with the funding composition of smaller banks. In practice, this allows retail-focus deposit takers to maintain lower liquidity holdings compared to the traditional Liquidity Coverage Ratio (LCR), thereby enhancing their competitive hedge.
• Reduced regulatory burden: Eligible institutions face less complex reporting and disclosure requirements (e.g. four subsections of the ALMM returns have been eliminated) making it easier for banks and building societies to meet their obligations.
• Cost savings: By reducing administrative overhead and compliance costs, firms can allocate resources more efficiently by focusing on developing area of the business such as innovation.

Eligible firms for this regime will generally be expected to meet the following criteria, though the PRA may exercise flexibility based on specific circumstances*.

• Size: Total assets on average over the past three years of no more than £20 billion.
• Domestic activity: The share of credit exposures located in the UK is at least 75% at all times and at least 85% on average over the past three years.
• Limited trading activity:
• Trading book business was equal to or less than both £44 million and 5% of total assets in recent months.
• Overall net foreign exchange position was equal to or less than 2% of own funds in recent months
• No positions in commodities or commodity derivatives.
• No Internal Ratings Based (IRB) approach. 
• Does not provide clearing, transaction settlement, custody or correspondent banking services to other banks and building societies unless they are members of the firm’s immediate group.
• Does not operate a payment system. 
• Does not have a non-UK parent.

*Firms can apply for a waiver/modification application form to bypass certain scope criteria. More details can be found on the BoE website.

The Single Capital Buffer (also known as SCB) will be the standalone replacement for the current Pillar 2B buffer framework. Currently, the buffer framework consists of the Capital Conservation Buffer, the Countercyclical Buffer and the PRA Buffer and totals a minimum of 4.5% RWAs. Three components would inform the SCB; Stress Impact; Risk Management & Governance assessment; and Supervisory Judgement. The SCB would need to be met entirely with CET1 capital and will be set at a minimum of 3.5% RWAs.