Small Domestic Deposit Takers (SDDT) PS15/23
Background
The Prudential Regulation Authority (PRA) has introduced the Strong and Simple Framework for domestic banks and building societies that are non-systemic. The banks and building societies that meet the eligibility criteria are classified as Small Domestic Deposit Takers (SDDT)[1] firms. This framework is fully consistent with the Basel Core Principles, but simpler than the that applicable to larger and internationally active banks.
As part of the SDDT regime, on 5th December 2023 the PRA published Policy Statement PS15/23 (The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements). This policy statement specifies the finalised SDDT criteria and prudential regulations for features (e.g., liquidity) not relating to capital requirements. The PRA plans to start consultation on the SDDT regime capital requirements in Q2 of 2024.
An overview of the SDDT regime as outlined in PS15/23 is given below (for non-capital requirements).
[1] In earlier discussion and consultation papers they were referred to as Simpler-regime Firms (SRF)
SDDT eligibility criteria
The diagram below provides a simplified and stylised representation of the SDDT criteria, which must be met at both on an individual and consolidated level
Even though there is a requirement for the Parent Undertaking firm to be an UK entity, subsidiaries of foreign banks may still qualify under the SDDT regime – provided it meets all the other SDDT criteria [including the condition that the Group’s total assets does not exceed £20 billion].
To qualify, the SDDT criteria must be met at the consolidation group and individual basis.
[2] As reported in FINREP F01.01
[3] Relevant exposures excluding exposures to governments, public sector enterprises, multilateral development banks, international organisations and institutions.
[4] Loans to individuals secured by UK property may be treated as located in UK
[5] As reported in COR001 C09.04
[6] As defined in Section 182 of the Banking Act 2009 and changes following Financial Services and Markets Act 2023. Also see HM Treasury – ‘Designation of payment systems: response to consultation’ for list of UK designated and other payment systems
Liquidity and disclosure changes
Several changes have been implemented to simplify prudential framework and reporting requirements, whilst maintaining their resilience.
Net Stable Funding Ratio (NSFR)
SDDT firms obtaining 50% or more of their funding via retail deposits (i.e., Retail Deposit Ratio[1] is 50% or more) do not have to calculate NSFR or submit the NSFR returns.
In the event the moving average RDR, calculated over the last four quarters, falls below 50% - the bank will have to calculate the NSFR and submit the related NSFR returns.
The simplified NSFR returns (C82.00 and C83.00) have been discontinued.
Pillar 2 Liquidity
For SDDT firms the PRA does not plan to generally[2] apply Pillar 2 liquidity guidance or request for related information (e.g., intra-day liquidity returns). However, banks are still required to assess liquidity risks that are not captured in Pillar 1 (i.e., LCR).
ILAAP
A new and simplified ILAAP template is provided for SDDT firms, with more emphasis on stress testing – as many parts are merged into the stress testing section. The ILAAP must be prepared at least on an annual basis. The simplified ILAAP structure for SDDT firms is provided below:
[1] Retail Deposit Ratio = Total retail deposits / Total funding
[2] However, in firm-specific instances, the Pillar 2 add-on might be applicable (e.g., risk management and governance failings)
Implementation timelines
The SDDT definition, application rules and disclosure rules come into effect from 1 January 2024. Banks that meet the eligibility criteria can apply for Modification by Consent (MbC). There is no time-limit before deciding to apply for the MbC (i.e., banks can decide to apply for MbC later as well – for example after the finalisation of the capital requirements).
The other rules (NSFR, Pillar 2 liquidity, ILAAP, liquidity reporting) comes into effect from 1 July 2024.
Phase 2: PRA consultation on capital requirements is planned for Q2 2024.
How We Can Help
Banks may encounter a range of challenges in managing the change arising from the new regulatory requirements, evaluating the thresholds, and adopting the new SDDT regime. At Katalysys, we have deep expertise in risk management and regulatory reporting.
Our team can assist in the following areas regarding the SDDT regime and implementation:
Evaluation of the various thresholds to check if the bank meets the SDDT criteria.
If eligible, conduct a cost-benefit analysis of the SDDT regime for the bank - keeping in focus the bank’s specific circumstances and future business plans.
Managing the overall change from the current regime to the new SDDT regime.
Documenting bank-specific assumptions and interpretations related to risk management and regulatory reporting.
Establishing procedures, processes, and methodologies to ensure ongoing compliance with the SDDT rules.
Providing guidance on implementing industry best practices related to risk management and regulatory reporting.
For more information, please contact:
Josh Nowak
Managing Director, Risk & Regulatory Consulting
T: +44 (0)7587 720988
Manish Patidar
Director, Regulatory Consulting
T: +44 (0)7766 001643