Recently, I submitted UK Finance’s response to the Prudential Regulatory authority’s Consultation Paper 7/24. This sets out its approach to the capital requirements for Small Domestic Deposit Takers (SDDTs) and is the final set of proposals that will implement a more proportionate approach to the prudential regulation of banks which meet certain criteria, including having assets of less than £20 billion.

The PRA has already introduced simplified liquidity and disclosure requirements, but firms have been awaiting the PRA’s proposals in CP7/24 relation to capital which when implemented, complete the SDDT regime, which will be implemented at start of 2027.

UK Finance has long supported a more proportionate prudential regulatory and supervisory regime for smaller firms so very much welcomed the earlier initiatives as well as many of the proposals in CP7/24, including the exclusion of foreign exchange and commodity risk from an SDDT’s calculation of market risk capital requirements We also supported the proposal that SDDT firms should no longer have to calculate Pillar 1 capital requirements for counterparty credit risk and credit valuation adjustment risk. SDDT firms are unlikely to have significant amounts of this type of exposure in the first place. But where they do have such exposures through their hedging activity the PRA expects them to have effective risk management and controls in relation to such derivative exposures, which of course we support.

But we did express concern about a couple of the PRA’s more significant proposals.

The PRA is planning to replace the potpourri of buffers that sit on top of the Total Capital Requirements that must be met all the time. The new Single Capital Buffer is certainly simpler, which is very helpful, although we believe its calibration at a minimum of 3.5 per cent of risk weighted assets is unduly conservative and should be lowered. In our view the calibration includes an element of the countercyclical buffer (CCyB). The CCyB is principally designed to ensure systemically important firms do not reduce lending to the economy in a time of stress, as well as to disincentivise increasing lending into a bubble. We understand that there is no expectation that SDDT firms should continue to lend in the event of an economic stress, so suggest the CCyB requirement could be removed from the SCB, reducing it to a minimum of 2.5 per cent.

We also are seeking more clarification of how the capital charge for operational risk will be determined. The PRA proposes three buckets, each one of which would have a total operational risk capital requirement, being the sum of Pillar 1 plus Pillar 2A, expressed as a share of the firm’s total assets.  Members have noted that the large incremental increases as a firm moves between the buckets as a result of increases in balance sheet size will lead to significant changes in required capital. For instance, the movement from bucket 1 to bucket 2 could result in a firm’s total operational risk (OR) capital (Pillar 1 and Pillar 2A) more than doubling from 0.3 per cent of assets to 0.65 per cent of total assets.

Such moves would create a cliff edge increase in total OR capital which it may be more difficult for firms to meet given their more limited acce4ss to liquid capital markets.

We welcomed the PRA’s plans to reduce reporting requirements for SDDT firms but encouraged it to be more ambitious, and to explore how it could use data already collected by other parts of the Bank of England. These could include statistical reporting and information on available collateral that firms submit in relation to their use of the focussed Term Funding Scheme with additional incentives for SMEs. Such experimentation, as well as being helpful for SDDT firms, could also inform, and be a test for, the PRA’s Banking Data Review and the Bank of England’s Transforming Data Collection project.

UK Finance looks forward to continuing to work with members and the PRA team, with whom we have already had good engagement as they consider our response.