The impact of the capital requirements for operational risk in the Hungarian banking system
The capital adequacy regulation which came into force on 1 January 2008 for the Hungarian banking sector, in line with the Basel II directives and generally applied in the European Union, brought the novelty of distinct management of operational risk. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, personnel and systems or from external events, which, similarly to financial risk, may result in substantial losses. The regulation allows for various methods of calculating the capital requirement. Financial institutions may opt for simpler approaches based on income indicators, or for more complex ones based on actual measures of risk. Based on the past oneyear period, it appears that the Hungarian banking system’s operational risk capital charge is significant compared to the total capital charge, with the operational risk capital charge for 2009 Q1 amounting to HUF 120 billion, equivalent to nearly 8% of the total capital requirements. The reported realised losses are lower than the capital requirement (approximately HUF 13 billion in 2008), but the capital charge must provide a buffer in extreme, unexpected situations, and conclusions on extreme values cannot be drawn based merely on one year of observation, therefore this discrepancy could be completely justified. Regarding institutions’ choice of approach, it can be established that larger institutions prefer more complex methods in both foreign and Hungarian practice. This is due to the fact that the introduction of more advanced approaches comes with a higher fixed cost, which larger institutions can absorb more easily over the short term, and moreover, they can take better advantage of the benefits offered. Overall, the conscious management of operational risk and application of more developed methods aimed at managing such risks can contribute to the stability of the financial system.
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- Kaushik Bhattacharya, 2003. "How good is the BankScope database? A cross-validation exercise with correction factors for market concentration measures," BIS Working Papers 133, Bank for International Settlements.
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