On 12 September 2024, PRA published CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs)
Overview:
The PRA is suggesting a plan to simplify various components of the capital structure, such as Pillar 1, Pillar 2A, buffers, and the calculation of regulatory capital. This proposal aims to create a much simpler regulatory system for Small Domestic Deposit Takers (SDDTs). It would streamline supervisory processes and reporting requirements, making them easier to understand and comply with. When considered alongside other publications like PS9/24, CP8/24, CP9/24, and CP10/24, these documents provide stakeholders with information about the PRA's plans for an overall capital framework for SDDTs. This framework covers various aspects, including Pillar 1, Pillar 2A, buffers, and the definition of capital.
The SDDT regime operates on a voluntary basis. Firms that meet the criteria for being an SDDT-eligible firm can choose to enter the regime by giving their consent through a Modification by Consent (MbC).
Proposed Changes:
- Implementing a Pillar 1 framework for SDDTs based on the Basel 3.1 standardized approaches for credit risk and operational risk.
- Removing the due diligence requirements in the standardized approach for credit risk, simplifying the market risk framework, and exempting SDDTs from certain capital requirements for counterparty credit risk in derivatives and credit valuation adjustment (CVA) risk, with a few minor exceptions.
- Simplifying the methodologies for credit risk, credit concentration risk, and operational risk in the Pillar 2A framework.
- Introducing a new Single Capital Buffer (SCB) framework to replace the existing buffers framework.
- Eliminating the adjustment between buffers and Pillar 2A known as the CCyB adjustment.
- Streamlining the Internal Capital Adequacy Assessment Process (ICAAP) and reducing the frequency of the review of the Internal Liquidity Adequacy Assessment Process (ILAAP).
- Simplifying certain complex capital deduction rules.
- Simplifying reporting requirements to align with the proposed changes.
- Making some adjustments to the operation of the SDDT regime to accommodate the proposed changes to the capital regime for SDDTs.
Implementation and next changes:
- This consultation closes on Thursday 12 December 2024.
- The proposed implementation date is 1st January 2027.
