Operational opportunities and challenges
This article looks at the key operational opportunities and challenges of the Strong & Simple regime.
The introduction of the Retail Deposit Ratio (RDR) provides benefits for retail-focused banks as the 50% threshold removes the requirement to populate the NSFR return. According to the Bank of England, shifting to the RDR will lead to a notable reduction in the reporting workload with firms potentially bypassing 4,294 data points [1]. Furthermore, the RDR's simpler structure not only reduces the computational burden but also better mirrors the funding composition of smaller banks, which primarily consist of retail deposits [2]. In contrast, larger banks with more diverse funding sources will find the NFSR more appropriate.
The S&S regime simplifies Pillar 2 liquidity requirements for smaller firms, aligning with their straightforward business activities. The simplified ILAAP removes the quantitative assessment of Pillar 2 adds-on and puts greater emphasis on guidance to make the document preparation more cost-effective.
The S&S regime's liquidity amendments also offer distinct advantages by reducing the regulatory reporting burden, as confirmed by an EBA study made on 251 banks. This impact is particularly significant in areas like the Additional Liquidity Monitoring Metrics (ALMM) and Pillar 3 disclosures, where numerous reporting templates have been streamlined or eliminated. For instance, the consolidation of Pillar 3 disclosure templates reduces the necessary data points from 88 to just 7.
Additionally, according to the EBA, simplifying the ALMM report alone could cut compliance costs by 2-3% for Small and Non-Complex Institutions (SNCIs). Even firms near the regulatory thresholds, who may not qualify as SNCIs, are expected to benefit [3].
While the Strong and Simple regime offers significant operational benefits, transitioning to it presents certain challenges for Small Domestic Deposit Takers (SDDTs):
Banks must understand the firm-specific impact of the new regime and how it differs from the current framework. For example, Banks may find the minimum requirements for Pillar 3 disclosures within the S&S regime are insufficient when they are looking to raise capital. They may be required to provide more information periodically to secure funding and reassure lenders. Due to lighter regulatory reporting requirements, preparation for capital raising or investment pitches [4] may take longer. International subsidiaries, that have parents reporting under the CRR, might find the running of two regimes results in the operational costs of moving to the S&S regime outweighing the benefits.
Banks need to modify their data management process to meet potentially less stringent, reporting requirements while maintaining accuracy and integrity. Banks will need to ensure that robust data governance and data quality control are efficient if the data management infrastructure were to change as a result. This is especially important if the PRA introduces additional principal-based layers to the S&S regime, as the most successful firms will have adaptable data structures to effectively manage future transitions. Given the regulatory focus on data risk, especially with the PRA’s new model risk management principles, supervisors may scrutinise firms that are unable to meet expectations. Additionally, employee training may be necessary to implement the new regulatory standards effectively.
While the new regime aims to reduce administrative overheads, streamlining processes does not always translate to time savings and reduced complexity. The liquidity changes to the ILAAP reduce the quantitative aspect of the process but equally put a greater focus on stress testing and prudential risk management. Hence, the aggregate time spent on internal liquidity assessments might remain unchanged. Additionally, while the new regime aims to reduce long-term regulatory costs, the transition may incur short-term expenses for dedicated IT projects, training, and compliance.
To conclude, an initial glance at the S&S regime suggests a multitude of operational benefits that stem from the reduced regulatory burden firms will face. However, there are several operational considerations, mainly relating to the cost of transitioning to new processes and prudential reporting structures, that senior management needs to be aware of when deciding whether to apply to become an S&S firm.
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[2] Bank of England Quarterly Bulletin 2014 Q4
[3] Final report - European Banking Authority (no date) Study of the cost of compliance with supervisory reporting requirements.
[4] Not Only What but Also When: A Theory of Dynamic Voluntary Disclosure
In this instalment of the FS regulatory affairs newsletter, we look back at our experts’ analysis of the regulatory developments announced in the second quarter of 2024. Our comprehensive overview covers topics relevant to firms across all sectors of Financial Services, as well as focused pieces for Banking and Insurance organisations.
The PRA is introducing a more proportionate prudential regime for less systemically important banks and building societies. This will be known as the ‘Small Domestic Deposit Takers’ regime.
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