Simpler but Stronger: What the SDDT Regime Means for Smaller UK Lenders

The Prudential Regulation Authority (PRA) has taken another major step in reshaping the UK’s prudential landscape with the publication of CP7/24 – The Strong and Simple Framework: The Simplified Capital Regime for Small Domestic Deposit Takers (SDDTs).

The proposals, due for implementation from 1 January 2027, mark a pivotal moment for small UK banks and building societies seeking a more proportionate, predictable, and efficient approach to capital regulation.

A proportional approach to capital

The PRA’s Strong and Simple initiative recognises a longstanding imbalance: the UK’s smallest deposit takers are subject to prudential rules designed for large, internationally active banks. While the Basel 3.1 framework strengthens resilience across the sector, its complexity can place disproportionate strain on smaller institutions with simple business models and limited international exposure.

The SDDT regime aims to resolve that tension by retaining the strength of the Basel framework while removing elements that add cost and complexity without meaningful prudential benefit. The result is a streamlined regime that remains strong in maintaining financial soundness, yet simple enough to be operationally sustainable.

Who qualifies as an SDDT?

Eligibility for the regime is limited to small, domestically focused firms. To qualify, a firm must:

• Have total assets of £20 billion or less;

• Be predominantly UK-focused, with more than 85% of exposures within the UK;

• Maintain a simple business model, with limited or no trading activity; and

• Operate without significant foreign operations or complex group structures.

Participation is optional and eligible firms can opt in through a Modification by Consent (MbC) process from mid-2026. The PRA will monitor firms’ eligibility annually, with re-entry provisions if thresholds are breached for a sustained period.

How the SDDT regime simplifies the rules

The SDDT framework restructures the entire capital stack: Pillars 1 and 2, buffers, ICAAP, and reporting to create a coherent, proportionate system.

1. Pillar 1: Simplified capital requirements

SDDTs will adopt the Basel 3.1 Standardised Approaches for credit and operational risk but with key simplifications:

• Credit risk: Firms will use the Simplified Standardised Approach (SSA): a version of Basel’s Standardised Approach that removes internal models and external ratings. Risk weights are driven by loan-to-value (LTV) bands and expo-sure class, eliminating model variability and complex due diligence obligations.

• Market risk: SDDTs are exempt from the Fundamental Review of the Trading Book (FRTB). Only simple interest-rate and FX positions are in scope, with fixed capital add-ons replacing sensitivity-based measures.

• Operational risk: All SDDTs will use the Business Indicator (BI) approach: a single, income-based calculation that removes the need for internal loss data or advanced modelling.

Together, these changes remove some of the most burdensome elements of Basel 3.1 while preserving risk sensitivity and comparability across firms.

2. Pillar 2A: Simplified and transparent

The PRA proposes a streamlined Pillar 2A framework for SDDTs, simplifying methodologies for credit, concentration, and operational risk. The aim is not to lower capital standards, but to make the process more transparent and predictable. Firms will still need to demonstrate adequate capital for idiosyncratic risks, but with reduced modelling expectations and clearer supervisory dialogue.

3. Buffers and stress testing

Perhaps the most significant change is the introduction of a Single Capital Buffer (SCB) — replacing the Capital Conservation Buffer (CCoB), Countercyclical Buffer (CCyB), and PRA buffer.

The SCB is calibrated using a Non-Cyclical Stress Test (NCST), designed to ensure resilience without the volatility of annual system-wide stress exercises. This stability allows small firms to hold lower management buffers, freeing up capital that might otherwise be trapped as “buffers on buffers”.

4. ICAAP and disclosures

Under the SDDT regime, the Internal Capital Adequacy Assessment Process (ICAAP) becomes more proportionate. Documentation, stress testing, and frequency are all simplified, but firms must still evidence sound capital planning and risk governance.

Disclosure requirements (Pillar 3) are similarly scaled down and annual, standardised templates replace the extensive quarterly Basel disclosures. The focus shifts from volume to clarity, ensuring transparency without unnecessary administrative cost.

Implementation timeline

The PRA plans to finalise the regime in mid-2026, with implementation from 1 January 2027. A transition period through to 2030 will allow firms to migrate from the existing Interim Capital Regime and adapt systems, data, and governance structures.

Early preparation including data mapping, RWA reconciliation, and governance alignment will be essential to ensure a smooth transition.

What this means for small lenders

For building societies and regional banks, the SDDT regime offers three tangible benefits:

1. Cost efficiency: simpler rules reduce the need for expensive model validation, data infrastructure, and consultant-heavy submissions.

2. Predictability: the Single Capital Buffer and non-cyclical stress test offer greater stability in capital planning.

3. Focus on governance: the framework prioritises oversight and prudence over technical modelling, reinforcing the idea that good governance, not complexity, underpins resilience.

However, “simpler” doesn’t mean “lighter-touch”. Supervisory engagement will remain robust, with the PRA expecting strong internal controls and clear evidence of capital adequacy. Firms should view this as an opportunity to enhance clarity and efficiency rather than dilute prudential rigour.

A chance to strengthen the sector

If implemented as proposed, the SDDT regime could reshape how smaller UK lenders engage with prudential regulation. By easing unnecessary burdens while maintaining resilience, the PRA hopes to support competition and diversity in the UK banking market by encouraging sustainable growth among smaller, member-focused institutions.

At Gini, we work closely with UK lenders to interpret and apply new prudential frameworks like the Strong and Simple Regime. Our team supports clients through the full process, from assessing SDDT eligibility and preparing data for the Simplified Standardised Approach, to updating ICAAPs and governance documentation.

We also deliver tailored training sessions for boards, risk, and finance teams to ensure firms not only comply, but understand how the new regime fits within their long-term capital and growth strategies.