Basel 3.1 and SDDT regimes – PRA issues final rules

The final rules take effect on 1 January 2027 and reflect minimal changes to Basel 3.1, via PS1/26, and the Small Domestic Deposit Takers regime (SDDT), via PS4/26. In addition to these core policy statements, the package of papers include PS3/26 to restate CRR requirements into the PRA Rulebook, and PS2/26 on retiring the refined methodology to Pillar 2A.

Firms can now move forward with their final implementation plans with greater regulatory certainty. However, to establish good practices they should also refer to the PRA’s recent Dear CEO letter, outlining its priorities for supervising UK deposit takers in 2026.

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Key changes to Basel 3.1

The final policy statement (PS1/26) notes the following key changes:

• updates to the PRA Rulebook Glossary with revised definitions for probability of default (PD), loss given default (LGD) and conversion factor for more accurate treatment of dilution risk 
• technical clarifications for required own funds, including expectations for international subsidiaries (which the PRA notes does not include ring-fenced banks), and an updated transition timetable
• minor clarifications, amendments and corrections to the credit risk standardised approach, internal ratings-based approach and credit risk mitigation
• an additional note that operational risk must include the current financial year in the three-year average calculation of the Business Indicator (or an estimate if unavailable), and clarifications over legal risk and dates for loss data sets
• amendments, corrections and clarifications to reporting and disclosure templates
• confirmation that the interim capital regime is no longer required due to improved alignment between Basel 3.1 and SDDT implementation dates.

Changes to market risk

The PRA also gives feedback on responses to CP17/25 surrounding market risk and confirms plans to delay the internal models approach by one year, to 1 January 2028. It has also:

• retained the 90% de minimis threshold for allocating collective investment undertakings (CIUs) to the trading book, with a 50% threshold for the look-through approach (LTA)
• confirmed the proposed residual risk add-on in the advanced standardised approach, with some clarifications
• confirmed it's moving forward with the proposed reporting and disclosure requirements.

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Capitalisation of foreign exchange permissions

Building on CP17/23, the PRA also confirms its approach to capitalisation of foreign exchange permissions. This includes amendments to the proposed exclusion of positions held at historical FX rates from own funds market risk calculations, and updated guidance for SFX permissions.

Key changes to SDDT

The PRA has published the final policy statement (PS4/26) for the SDDT regime, building on the near-final rules from October 2025 (PS20/25). It’s important to note that it has not made substantive changs since then, but states minor amendments for clarity and to reflect changes in the PRA rulebook for CRR firms. It also notes minor corrections and clarifications for reporting. 

The deadline to consent (or note an intention to consent) to becoming an SDDT firm, is 31 March 2026 and smaller firms that don’t respond will automatically fall under Basel 3.1 from 1 January 2027.

Supporting financial resilience

In its recent ‘Dear CEO’ letter, the PRA highlights the importance of financial resilience, with a particular focus on Basel 3.1 and SDDT implementation. The regulator specifically notes its data collection exercise to help rebase Pillar 2 requirements, with a final submission deadline of 31 March 2026 (although earlier submissions are encouraged). Firms must ensure their data is of sufficiently high-quality to support supervisory effectiveness.

However, the PRA expects boards to “seek assurance over the accurate calculation and reporting of their risk weighted assets for the rebasing exercise and the implementation of the Basel 3.1 standards or the Strong and Simple framework”. The PRA has not explicitly stated this requirement before, and many firms will need to arrange additional assurance, with Board-level oversight. 

With regards to the Internal Capital Adequacy Assessment Process (ICAAP), the PRA notes that the 2026 submission must include an impact assessment of Basel 3.1/SDDT. ICAAPs prepared post-implementation should be based on the new prudential frameworks.

Key activities for 2026

With the final deadlines looming, this year is a critical period for finalising Basel 3.1/SDDT approaches, and preparing for the transition. Key activities to stay on track include:

• preparing for the PRA’s data collection exercise, with the necessary Board-approved assurance in place
• assessing the impacts of all Basel 3.1/SDDT compliance activities across the business
• mapping, testing and embedding all underlying models and systems
• ensuring all regulatory reporting templates are up to date with robust underlying data governance processes – including adequate testing of new or amended templates to ensure business readiness ahead of go live 
• reviewing resource requirements to ensure appropriate skillsets are in place during peak periods and into business as usual 
• train relevant teams on the new rules, including those at management and Board level 
• considering oversight, governance and escalation processes to ensure a robust control environment. 

For further information and guidance on Basel 3.1 or SDDT, contact Kantilal Pithia.

UK Regulatory Handbook 2026

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