Key Observations on Bank of England’s SDDT Consultation Paper (CP7/24)

• The proposed implementation date for the new capital rules is 1 January 2027. 
  • SDDT firms would be able to utilise the Interim Capital Regime during 2026 to avoid the need to implement the full Basel 3.1 standards.
• A Single Capital Buffer (SCB) is being introduced. 
  • This would replace the current buffers framework which consists of the Capital Conservation Buffer, the Countercyclical Buffer and the PRA Buffer. 3 components would inform this buffer; Stress Impact; Risk Management & Governance assessment; and Supervisory Judgement. In many respects, this is similar to how the current PRA Buffer is calculated. The SCB would need to be met entirely with CET1 capital.
• Buffer requirements should fall by around 12.5% across the sector.
  • The SCB would be set at a minimum of 3.5% RWAs. This would result in a reduction of 1% RWAs versus current buffer requirements for most firms.
• Use of the SCB during stress would not compel Banks to suspend dividend payments. 
  • Firms utilising their SCB in a stress event would not automatically trigger any PRA actions. This is unlikely to make much of a difference from the current regime. This is because the regulator is highly unlikely to allow a Firm to continue paying dividends while it enters capital buffers during stress.
• There is a broad alignment between the SDDT Pillar 1 framework and Basel 3.1.
  • The same rules for the calculation of Credit Risk and Operational Risk would apply. Having comparable Pillar 1 requirements would help reduce barriers to entry and exit from the SDDT regime. This is of particular interest to fast-growing Challenger firms.
• The Pillar 2A Capital framework is being simplified.
  • Credit Risk, Credit Concentration Risk and Operational Risk approaches would be simplified for most SDDT firms. Pillar 2A Market Risk and Group Risk would no longer apply for SDDT Firms.
• There is a major overhaul in the approach to setting Pillar 2A Operational Risk.
  • Most SDDT Firms would be aligned with 1 of 3 different risk buckets. Their capital requirement would be a percentage of total assets, with this figure aligned to each risk bucket. The PRA would also provide firms with much-needed guidance on how to conduct P2A Operational Risk scenario analysis in the ICAAP.
• SDDT firms would be expected to update their full ICAAP document every 2 years.
  • They would still need to update their Pillar 2A and Pillar 2B analysis on an annual basis. These rules won’t apply to New Banks or firms with ICAAPs deemed to be low quality. Because Pillar 2A and Pillar 2B analysis is often the most complex aspect of the ICAAP for smaller firms, we believe that the impact of this would be less significant than at first glance.
• There would also be a corresponding reduction in how often SDDT firms would need to produce their ILAAP. 
  • Firms would now only need to review their ILAAP and update the document every two years.
• The PRA would create tailored reporting templates for SDDT firms.
  • These would be based on the amended Basel 3.1 regulatory reporting requirements but would be simplified.
• Finally, the PRA is proposing toremove the Refined Approach and CCyB Pillar 2A Adjustment.
  • These two overlays are deemed to be unnecessarily complex. Their existence reflected a tacit acknowledgement from the regulator that the current capital regime resulted in unfairly high capital requirements for smaller firms. The SDDT regime removes the need for both. This will be welcomed as it would improve the transparency of the capital-setting regime.

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