Small Domestic Deposit Takers (SDDT) regime: an overview

Key summary

Our discussions with the industry suggest that the criteria for defining an SDDT may be more flexible than published guidance suggests. We have had conversations with firms who may be in breach of one of the criteria associated with the SDDT regime, but they have been invited by their supervision team to apply anyway.  This appears to be particularly true of firms that are flirting with the Limited Trading Activity and/or Domestic Activity thresholds. As a result, if you are working at firm that is on the threshold of one or even two SDDT criteria, it may be worth discussing potential eligibility for the SDDT regime with your supervision team. 

There will be broad alignment between the SDDT Pillar 1 framework with Basel 3.1. The same rules for calculation of Credit Risk and Operational Risk will apply. The regime removes the need for Market Risk FX risk calculation, CVA and Credit Concentration Risk assessments in Pillar 1. However, in practice we don’t believe this is going to make a significant difference for SDDT firms. This is because most non-systemic firms don’t have these risk exposures anyway. 

This is despite the fact that under the proposals, use of the SCB will not formally trigger any regulatory actions. 

The Pillar 2A Credit Risk, Credit Concentration Risk and Operational Risk framework is being simplified. Pillar 2A Market Risk and Group Risk would no longer apply for SDDT firms. While the aim of the PRA is that the overall capital requirement for most firms will largely stay the same, that isn’t to say there won’t be some potential winners and losers. Under current proposals, the Refined Approach will be revoked. For low risk building societies and banks that currently form the bulk of firms on the Refined Approach, there is a strong probability that their P2A capital requirements will notably increase.

A Single Capital Buffer (SCB) is being introduced. Three 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 Bank of England thinks that this proposal will be a big benefit for firms. This is because it will make the Pillar 2B capital requirement more consistent and easier to understand. We have doubts about this, which are set out below:

1. We believe that the main component of the P2B Buffer framework, the Combined and Countercyclical Buffers are actually easy to the follow and understand. The SCB is more idiosyncratic and subjective.
2. We are unsure if, in practice, a single buffer will really reduce incentives for firms to hold additional management buffers (the concept of buffers on buffers).
3. Because of recent experience during the Covid-19 crisis, we don’t believe that the regulator would be content with firms continuing to pay out dividends or other disbursals in stress. This is despite the fact that under the proposals use of the SCB will not formally trigger any regulatory actions. 

Firms will only need to complete a full ICAAP once every two years. However, the expectation remains that the P2A and P2B sections of the ICAAP document will be refreshed on an annual basis. These are the most substantive sections of the ICAAP document.