The PRA’s “Strong and Simple” Regime for Small Domestic Deposit Takers

By James Bowpitt — published 2025-12-07, last updated 2025-12-07.

What is the PRA trying to achieve with this new regime? In essence, the objectives are threefold. First, to reduce undue regulatory burden on smaller domestic firms. Complexity carries costs as small firms have fewer resources to manage elaborate risk models, endless reporting templates, and intricate capital calculations. By simplifying these areas, the PRA expects to cut compliance costs and free up management capacity for serving customers and growing the business. Second, to maintain resilience and safety in the sector. The PRA has been unequivocal that “strong and simple” must not mean “weak and worrisome”. Simplified firms should still hold adequate capital and liquidity and be rigorously managed. The goal is a simpler regime without compromising prudential soundness. Third, to enable growth and competition. A simpler framework should lower barriers to entry and expansion for well-run new firms and building societies. Successful small firms should be able to grow under this regime up to a point, and if they eventually become larger or more complex, there would be a smooth pathway to transition into the fuller Basel framework. The PRA explicitly seeks to avoid creating new “cliff edges” or barriers that might trap firms at a small size. In short, the Strong and Simple regime is meant to foster a dynamic, diverse banking sector where regulation is proportionate: easing burdens on community and challenger firms while still upholding high standards of risk management and financial stability. Phase 1 – Simplifying Liquidity and Disclosure (Non-Capital Reforms) The implementation of the Strong and Simple framework was planned in two phases. Phase 1 focuses on non-capital prudential requirements – namely liquidity standards, regulatory reporting, and disclosure. These are already live. Phase 2 – Simplified Capital Requirements (Planned for 2027) Phase 2 of the Strong and Simple regime is now on the horizon. This phase deals with the capital framework – arguably the most complex part of prudential regulation. The PRA’s proposals for a simplified capital regime were released in September 2024 (Consultation Paper CP7/24) and are expected to be finalized in 2025. The PRA has signalled a clear timeline: the simplified capital requirements for SDDTs would take effect on 1 January 2027. This date now aligns with implementation of the full Basel 3.1 reforms in 2027. Let me highlight the main components of the Phase 2 capital regime. Basel 3.1 Alignment in Pillar 1 (with Targeted Simplifications) In broad terms, SDDTs will calculate their minimum capital (Pillar 1) requirements using the Basel 3.1 standardized approaches – the very same updated formulas that will apply to larger firms. This means, for credit risk, SDDTs must adopt the new Basel 3.1 Standardised Approach (with its more risk-sensitive risk weights for different asset classes) and the associated credit risk mitigation rules. For operational risk, SDDTs will use the Basel 3.1 Standardised Approach (replacing the old Basic Indicator or standardized approaches that existed before). However, crucial simplifications are proposed to reflect SDDTs’ limited scope of activities: notably, these firms  will be exempt from the most complex Basel capital charges that are largely irrelevant to their simple profile. SDDTs will not be required to calculate market risk capital using Basel’s new market risk framework (FRTB). Likewise, SDDTs will be exempt from the Credit Valuation Adjustment (CVA) risk capital charge and from counterparty credit risk (CCR) calculations on derivatives, except in very limited cases. In short, a compliant SDDT will not need to implement the Basel 3.1 methodologies for market risk, CVA, or complex counterparty exposures, because such a firm doesn’t engage materially in those activities. The result is a Pillar 1 regime nearly identical to Basel 3.1 for core credit and operational risks but shorn of peripheral components that matter only to trading firms. R…

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Source references include the Bank of England PRA, the European Banking Authority, and the Basel Committee on Banking Supervision.