A recent webinar hosted by Scotland-based ALMIS International, delved into the world of Small Domestic Deposit Taker (SDDT) compliance offering firms advice and guidance.
Titled ‘Mastering SDDT Compliance: A Deep Dive into Requirements, Implications & Automation’, it was joined by ALMIS CEO Luke Di Rollo, head of client experience Stuart Fairley and business development manager Rachel Reilly.
SDDT is an upcoming regulation from the UK’s Prudential Regulatory Authority (PRA), which has faced a couple of delays over the years. Having recently been delayed from its January 2026 implementation date, it is now set for a January 2027 implementation to coincide with Basel 3.1.
The regulation aims to simplify the prudential framework for small domestic-focused banks and building societies. It simplifies various aspects of Basel 3.1, including changes to market risk framework, new methodologies for credit risk, credit concentration risk and operational risk, and a single capital buffer framework.
Eligibility criteria for SDDT includes total assets not exceeding £20bn on a three-year average, have limited trading activity and be focused on the UK market.
The speakers on the webinar offered a detailed explanation of the timeline and the changes being brought forward through SDDT.
With the scene set, the webinar dived into specific areas of the regulation and answered any questions financial institutions might have about the regulation.
The first of these it covered was around real estate exposures. There are three ways real estate exposure can be categorised: acquisition development and construction (ADC), regulatory real estate and other real estate.
ADC is typically the financing of real estate projects, such as offices and retail units, with the loan repayment is dependent on the sale or lease of the building and these are typically short to medium duration commitments with progressive drawdowns.
As for regulatory real estate, this is lending on residential or commercial real estate, including self-build mortgages. For those that don’t fall into this category would come under the other real estate category, such as houseboats, mobile homes or time shares.
The panelists added that if a firm is lending into an ADC project, the standard risk weighting is 150% but there are certain criteria that can lower this. For instance, if the project is ongoing but the firm has sold or pre-leased a substantial part of the construction, or if the firm has done sufficient due diligence into the credit trustworthiness of the borrower, such as a completion guarantee, then the lower risk weight of 100% can be taken.
The speakers continued by discussing regulatory commercial real estate exposures, credit risk loan valuation methodology, credit risk residential real estate exposures, and more.
Another topic of discussion focused on currency mismatch exposures. Under the SDDT and Basel 3.1, real estate and retail exposures where there is an (unhedged) currency mismatch between the income of the obligor and the currency of the exposure, there is a requirement to apply a risk weighting multiplier of 1.5 to applicable risk weights, which is capped at 150%.
This could be a firm lends to someone in pounds but maybe their income is in euros, but this is not something the firm is hedging, then the risk weight would be eligible for that multiplier.
One of the viewers of the webinar asked the speakers what would happen in a joint account scenario. For instance, maybe in a mortgage agreement one of mortgagees has their income paid in pounds and the other in another currency. Similarly, someone could have a property in the UK, but they are living abroad and collecting rent on that property, there are also issues with whether the mismatching rules come into effect.
The guiddance isn’t prescriptive, so the challenge revolves around what data the firm is capturing around the situation, the panelists explained.
To hear the full insights from the discussion, watch the webinar here.
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