Risk Advisory · Strong and simple capital regime
The small domestic deposit taker (SDDT) regime is the PRA’s simpler prudential regime for UK banks and building societies that meet nine eligibility criteria and choose to join; its capital rules apply from 1 January 2027 under PS4/26. We help eligible firms decide whether to opt in, then rework the ICAAP and ILAAP for the route the board chooses.
The decision rests on a forward view of the eligibility tests and a capital comparison with Basel 3.1 that the board can challenge line by line.
By Mark Dougherty, CPA (CAN)Updated
Dates
SDDT capital regime and SDDT reporting take effect
The PRA published the final rules in PS4/26 on 20 January 2026, the same day as the final Basel 3.1 rules in PS1/26.
Some parts applied from publication: the rules on how often an SDDT updates its ICAAP (including reverse stress testing) and its ILAAP, and the changes to SoP2/23, the PRA’s statement of policy on operating the regime. For a firm already in the regime, the ICAAP calendar has already changed.
The Interim Capital Regime never operated. It was meant to let eligible firms keep their existing capital requirements until the SDDT capital regime arrived. Once both regimes were set to start on 1 January 2027, the PRA said it was no longer required, and it revoked the rules on 20 January 2026. For 2027, an eligible firm chooses between the SDDT capital regime and Basel 3.1.
Sources: PRA PS4/26 The Strong and Simple Framework, 20 January 2026, paras 1.15 to 1.17; PRA PS1/26, 20 January 2026, para 2.16; PRA PS19/24.
Eligibility
A UK bank or building society must meet all nine criteria. In a group, criteria 1 to 6 apply on a consolidated basis and to each UK bank and building society in it; criteria 7 and 8 apply to each UK bank and building society. Run the nine tests on your own figures with our free SDDT eligibility checker.
| Criterion | Test | Rule |
|---|---|---|
| Size | 36-month average total assets no more than £20 billion | 2.1(1) |
| UK exposures | At least 75% of relevant credit exposures in the UK at all times, and a 36-month average of at least 85%; UK residential loans to individuals may count as UK | 2.1(2) |
| Trading book | On- and off-balance-sheet trading book business no more than both £44 million and 5% of total assets, met on the last day of at least one of the last three months and at least six of the last twelve | 2.1(3) |
| Foreign exchange | Overall net foreign exchange position no more than 3.5% of own funds, and a monthly average (mean of daily positions) of no more than 2% of own funds in at least one of the last three months and at least six of the last twelve | 2.1(4) |
| Commodities | No positions in commodities or commodity derivatives | 2.1(5) |
| Credit risk approach | Does not use the internal ratings based (IRB) approach for credit risk | 2.1(6) |
| Services to other banks | No clearing, settlement, custody or correspondent banking services to other banks, except sterling services within its immediate group | 2.1(7) |
| Payment systems | Not an operator of a payment system | 2.1(8) |
| Ownership | Any parent undertaking is a UK undertaking | 2.1(9) |
Both averages run over 36 months, and an average trails a growing balance sheet. A lender at £19 billion and growing fast can pass today and fail inside its business plan, while one just past £20 billion can still pass. A firm near a line needs a forecast of each average across the plan before the board decides. The PRA will review the criteria no later than the end of 2028.
Sources: PRA Rulebook, SDDT Regime: General Application, rules 2.1 to 2.6 (as at 29 September 2026); PRA PS15/23, 5 December 2023, para 2.27.
What changes
PS4/26 confirmed the near-final policy in PS20/25 without substantive change. For a firm that opts in, the main differences from Basel 3.1 are these.
Sources: PRA PS20/25, 28 October 2025, paras 1.14 and 1.38; PRA PS4/26 The Strong and Simple Framework, 20 January 2026, para 1.12; PRA PS15/23, 5 December 2023, paras 1.25, 2.110 and 2.123.
The decision
Joining is voluntary, and not every eligible firm has joined: by 13 October 2025, 56 firms had opted in out of around 80 the PRA estimated were eligible.
Start with capital. The SDDT Pillar 1 builds on the Basel 3.1 standardised approaches, so the gap between the regimes sits in what the SDDT regime changes: due diligence requirements, CVA, derivative counterparty credit risk, market risk, Pillar 2A and the buffers. A lender hedging fixed-rate mortgages with swaps has more riding on the answer than one with no derivatives. On buffers, compare the Single Capital Buffer’s 3.5% floor with today’s stack: the 2.5% capital conservation buffer, the countercyclical buffer and any PRA buffer.
Then look past capital. An SDDT reports less and updates its ICAAP and ILAAP every two years. It is also out of scope of the step-in risk rules, which have applied since 1 January 2026 to banks and building societies outside the regime. A firm that stays on Basel 3.1 runs the full rulebook, but its plan is free of the SDDT criteria, so it can grow past £20 billion or move to IRB.
Sources: PRA PS20/25, 28 October 2025, paras 1.14 and 1.17; PRA PS5/25, 22 April 2025, paras 1.2 and 1.15; PRA Rulebook, Capital Buffers, rule 2.1.
ICAAP
Both routes change the ICAAP in 2027.
| Area | Stay on Basel 3.1 | Opt in as an SDDT |
|---|---|---|
| Pillar 1 | Full Basel 3.1, including CVA, derivative counterparty credit risk and the new market risk approaches | Basel 3.1 standardised credit and operational risk, with CVA and most derivative counterparty credit risk capital disapplied |
| Pillar 2A | SoP5/15, after the PRA’s off-cycle review for Basel 3.1 double counting | Simplified SoP5/25 methodologies |
| Buffers | Conservation, countercyclical, systemic where relevant, and any PRA buffer | Single Capital Buffer, with no automatic maximum distributable amount (MDA) restrictions |
| Stress testing | Cyclical framework | Non-cyclical framework |
| Supervisory statement | SS31/15 | SS4/25 from 1 January 2027 |
| Update cycle | Unchanged | Two years (except new and growing banks), since 20 January 2026 |
| Step-in risk | Step-in assessment and policy, with data items submitted alongside the ICAAP | Out of scope |
Either way, the refined methodology to Pillar 2A is retired for all firms from 1 January 2027, so a firm that relies on it has a Pillar 2A change to model on both routes. For a firm staying on Basel 3.1, our Basel 3.1 page sets out the implementation work.
Sources: PRA PS4/26 The Strong and Simple Framework, 20 January 2026, para 1.16; PRA PS20/25, 28 October 2025, para 1.14; PRA PS2/26, 20 January 2026, para 1.11; PRA PS9/24, 12 September 2024, para 6.6.
How we help
We can advise while your team holds the pen, or do the work and hand it over with the models and assumptions documented.
All nine criteria, tested for the firm and, in a group, for the consolidated position and each UK bank and building society.
The 36-month averages projected across the business plan, so the board sees whether, and when, a line could be crossed.
Standardised RWAs from the RisKIT Basel 3.1 ICAAP model, with Pillar 1, Pillar 2A and buffers set against the SDDT regime and every assumption written down.
For an SDDT, an ICAAP written to SS4/25 and the two-year cycle. On Basel 3.1, one rebuilt on the new RWAs with step-in risk added.
An ILAAP on the simpler SDDT template, and a test of whether the Retail Deposit Ratio lets the firm stop monitoring the NSFR.
Both routes set side by side with their effect on the business plan, so the decision and its reasons are on record.
The work is led by Mark Dougherty, CPA (CAN), our technical lead, with senior practitioners who have held these roles: former CROs and heads of risk, former regulators and interim executives, working with model and quant specialists across our Risk Advisory practice.
FAQ
All nine criteria, which means data going back three years: 36 months of total assets and of credit exposures split between the UK and elsewhere for the two averages, and the last twelve months of trading book and foreign exchange positions for criteria 3 and 4. For a first view on your own figures, our free SDDT eligibility checker runs the nine tests.
Whether to opt in, on a paper that sets both routes side by side; opt in or stay lists what weighs on it, from derivative hedging and the 3.5% buffer floor to plans to grow past £20 billion or move to IRB.
Yes, on either route. The ICAAP comparison shows what changes on each, and our ICAAP and ILAAP pages describe how we write and review them.
It is the one buffer an SDDT holds instead of the capital conservation, countercyclical and PRA buffers. The PRA has said it will be no lower than 3.5% of RWAs; each firm’s own level is confidential, and the automatic MDA restrictions no longer apply. For a new and growing bank it covers six months of projected operating expenses, with the same 3.5% minimum.
Insights
SS4/25 is the PRA supervisory statement that sets its expectations of the ICAAP for small domestic deposit takers. It replaces SS31/15 for SDDTs from 1 January 2027, and its expectations on how often an SDDT updates its ICAAP have applied since 20 January 2026, when PS4/26 brought the two-yearly cycle into force.
By Mark Dougherty, CPA (CAN) · 8 min read
Most UK banks and building societies that meet the nine SDDT criteria, and expect to keep meeting them, should join the strong and simple regime. From 1 January 2027 an SDDT holds one Single Capital Buffer...
By Mark Dougherty, CPA (CAN) · 6 min readA practical guide to the PRA's simplified capital regime for small domestic deposit takers: eligibility, the choice to opt in and what changes.
By Mark Dougherty, CPA (CAN)Next step
Bring three years of reported total assets and the growth in your business plan. We will tell you whether the firm qualifies and what the board needs to weigh before it decides.
Tell us what needs doing and by when. A partner will come back to you. Treated in confidence.
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