Regulatory Influencer: Simplifying Capital for Smaller UK Banks: Navigating the SDDT Regime and Supervisory Expectations

With less than a year until key elements of the Small Domestic Deposit Taker (SDDT) regime come into force in the UK, affected banks face a compressed timeline to turn policy into practice. The UK’s Prudential Regulatory Authority (PRA) published a near-final policy statement for the simplified capital regime in October 2025 and its final policy statement in January 2026, confirming both the simplified rulebook instruments and related supervisory expectations.

While the simplified capital regime is scheduled to take effect on January 1, 2027, certain supervisory expectations such as revised ICAAP update frequencies are already effective as of  January 20, 2026.

Firms that expect to qualify as SDDTs need to be well advanced on implementation planning to meet both current and upcoming requirements.

In 2021, the PRA launched its “Strong and Simple” initiative, aiming to simplify and calibrate prudential regulation for smaller, less complex UK banks and building societies. This marked the start of the PRA’s attempt to ensure that the rules these banks face are more proportionate and reflective of their risk profile, reducing the regulatory complexity for smaller firms while maintaining adequate resilience. 

The Small Domestic Deposit Taker (SDDT) regime sits within the PRA’s Strong and Simple framework with simpler but equally resilient prudential requirements for SDDTs. In its consultation paper, CP5/22, and subsequent consultation, CP7/24, the PRA proposed a significantly simplified capital regime, streamlined Pillar 1 and Pillar 2A methodologies, a single capital buffer framework, and reduced reporting and ICAAP/ILAAP burdens for SDDTs.

These proposals have now been carried through into the final policy published in January 2026, with the PRA formally consolidating the simplified capital regime and associated supervisory materials into its rulebook and policy framework. 

SDDT Criteria

To benefit from the SDDT regime, the bank in question must meet the following requirements: 

• UK-headquartered with no significant international activity.
• Does not have a non-UK parent: Not part of a wider international banking group. Firms failing this criteria may be considered via Modification by Consent (MbC) (a formal PRA process under which an eligible firm consents to a modification of the relevant PRA Rulebook provisions to enter the SDDT regime).
• Total assets on average over the past three years of no more than £20bn.
• The share of credit exposures located in the UK is at least 75 percent at all times and at least 85 percent on average over the past three years.
• Trading book business was equal to or less than both £44m and 5 percent of total assets in recent months. The criterion is not met if a firm has been above one or both of these thresholds in each of the preceding three months or in more than half of the months in the past year.
• Overall net foreign exchange position was equal to or less than 2 percent of own funds in recent months. The criterion is not met if a firm has been above the threshold in each of the preceding three months or in more than half of the months in the past year. Overall net foreign exchange position must not exceed a ceiling of 3.5 percent of own funds.
• No positions in commodities or commodity derivatives.
• Does not use an internal ratings‑based (IRB) model for credit risk to calculate risk weighted assets.
• 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.
• If the firm is part of a consolidated UK banking group, all group entities must satisfy the criteria to be treated as SDDTs, and the consolidation entity must also meet these eligibility requirements.

SDDT Regime

The SDDT regime is being implemented in two distinct phases, with different elements taking effect at different points in time. Phase 1, which has already been implemented, focused on simplifications to liquidity and disclosure requirements, alongside the eligibility criteria that firms must meet to qualify as an SDDT. These measures were introduced following earlier Strong and Simple policy statements and are already reflected in firms’ regulatory frameworks.

Phase 2, which is now in the final stages of implementation, sets out the simplified capital regime and additional liquidity simplifications for SDDTs. Phase 2 was finalised through the PRA’s policy statements published in October 2025 and January 2026, with certain supervisory expectations applying from January 2026 and the core simplified capital requirements scheduled to take effect from January 1, 2027. Phase 2 consists of Pillar 1 and Pillar 2A requirements:

Pillar 1 

Under the final SDDT regime, Pillar 1 capital requirements for SDDTs are based on the Basel 3.1 standardised approaches for credit risk and operational risk, but are simplified to reflect SDDTs’ limited trading activity and business models. SDDTs are exempt from counterparty credit risk (CCR) and credit valuation adjustment (CVA) capital requirements for derivatives (with narrow exceptions), and apply the standardised operational risk approach rather than more complex methodologies. Consequential changes are made to leverage ratio and large exposure calculations to reflect these simplifications. SDDTs remain subject to the general minimum own funds requirements as implemented under Basel 3.1.

Pillar 2A 

Under Pillar 2A, the PRA has introduced a number of simplifications for SDDTs aimed at reducing unnecessary complexity while maintaining an appropriate level of resilience. These include the removal of reliance on IRB benchmarking, a simplified and more standardised treatment of credit concentration risk, and the introduction of a single capital buffer to replace multiple buffer components previously applicable under the Pillar 2 framework.

In addition, the PRA has confirmed reductions in the frequency of certain internal assessments for SDDTs, including the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP), reflecting the lower risk profile and simpler business models of firms within scope of the regime. SDDTs are also de-scoped from a number of regulatory reporting templates that are not relevant to their activities, with remaining templates streamlined to reduce reporting burden.

The PRA published the final policy for the SDDT Pillar 2A framework in January 2026, including updated supervisory expectations and amendments to relevant supervisory statements. The PRA has confirmed that although the final policy for the SDDT capital regime has now been published, the final rule instruments implementing the regime will be made in line with the UK’s implementation of the Basel 3.1 standards. This sequencing reflects the need for HM Treasury to make commencement regulations revoking the relevant provisions of the Capital Requirements Regulation (CRR) before the PRA can fully implement its replacement rulebook provisions. As a result, the simplified SDDT capital regime, including Pillar 1 and Pillar 2A requirements, is expected to take effect from January 1, 2027, consistent with the UK’s Basel 3.1 implementation timetable.

Key Milestones to Prepare For

1. January 2027: From January 1, 2027, this simplified capital regime will become effective for opted-in firms and the fully simplified capital rules will apply. Firms will apply the fully simplified Pillar 1 and Pillar 2A requirements rather than the full regime for larger banks. This is also the date at which full Basel 3.1 alignment for the simplified regime is operational.

2. March 2026: March 31, 2026 is the date by which eligible firms must have notified the PRA if they wish to join the SDDT regime.

   Firms that meet all SDDT eligibility criteria can opt in directly, while those that do not fully meet the criteria may need to seek a Modification by Consent (MbC) to participate.

   The period leading up to this date should be used to engage with the PRA, confirm eligibility, assess whether systems, governance and data are aligned with SDDT requirements, and plan for the transition to the simplified regime.

   Firms that miss this deadline may not be able to enter the SDDT regime at its start in January 2027, and will instead remain subject to the full Basel 3.1 regime when it comes into effect in January 2027. Opting in ahead of the January 2027 effective date allows firms to begin transition planning in advance; to take advantage of simplified reporting, capital and Pillar 2A requirements; and to engage with the PRA on supervisory capital buffer (SCB) calculations and data collection.

3. December 2025: The PRA used December 31, 2025 as the reference date for collecting quantitative and qualitative data from firms eligible, or intending, to opt in to the SDDT regime. Firms should have prepared and finalised their Pillar 2A templates as of this date. This off-cycle review provided the PRA with the information needed to assess firms’ readiness and support transition planning for the simplified capital regime.

    

In light of this timeline, although the full capital rules take effect in January 2027, firms should be preparing in 2026 to ensure a smooth transition and to maintain regulatory readiness. Preparatory measures and the reasons for these include the following:

• Even under the simplified framework, the Basel 3.1 standardised approaches for credit and operational risk are more risk-sensitive than previous rules, particularly for credit exposures. Firms will need to classify exposures by type, capture historical default and loss-given-default data, and reflect collateral and guarantees accurately. Firms should review and enhance data pipelines, implement automated reconciliations and ensure that internal systems can extract, aggregate and validate data for both Pillar 1 and Pillar 2A reporting. Building or upgrading analytical tools for credit risk, operational risk, concentration risk and stress testing will help meet PRA expectations efficiently. Early testing of these processes can reduce the risk of errors once the regime takes effect.
• Given the complexity of the upcoming regime, SDDTs should begin operational planning imminently and work on strengthening governance frameworks. Firms should review board-level oversight of capital and risk management, update ICAAP and ILAAP methodologies, and confirm that escalation paths for risk and capital decisions are clear. Implementing or refining stress-testing frameworks and assessing concentration risk will allow management to make informed decisions and ensure regulatory alignment. Documenting methodologies, assumptions and governance decisions is essential, as the PRA will review these during supervisory engagement.
• Although many templates have been removed under the simplified regime, firms must be prepared for updated reporting and compliance obligations. The regime introduces new, proportionate reporting templates designed to capture both Pillar 1 and Pillar 2A capital calculations, stress-testing results and concentration-risk exposures. Many of the previous detailed templates have been removed, but SDDTs will still need to ensure that internal systems can extract, reconcile and validate the required data accurately and consistently. Firms should also maintain robust documentation to support methodologies, assumptions and governance decisions, as the PRA will review these during supervisory engagement. Early testing of reporting processes and alignment of internal controls will help firms meet the regime’s requirements efficiently and reduce the risk of reporting errors.

Early 2026 preparation is critical and by strengthening systems, data, and governance, firms can ensure readiness under the SDDT regime and enter January 2027 fully prepared.