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Principles of Proportionality in Credit Institutions’ Operational Risk Management

Author

Listed:
  • Norbert Kozma

    (Magyar Nemzeti Bank)

Abstract

Operational risk is a natural risk inherent in credit institutions’ activity, and the scope of this risk is becoming increasingly broad. In parallel with banking practices, supervisory authorities have continuously attempted to identify potential risks and ensure that the capital requirement provides sufficient cover for them. In the practical implementation of this, the regulation regards proportionality as a fundamental principle; however, the interpretation and implementation of this into supervisory practice encounters difficulties. Relying on a wide-ranging analysis of operational risk management applied by small, medium-sized and large banks, this paper provides assistance in the proper application of the principle of proportionality, although it cannot undertake to resolve the dilemmas related to the principles of proportionality. In addition, it contributes to the improvement of the operational risk framework and thereby to reducing the range of continuously growing natural risks, based on the analysis of Hungarian credit institutions’ data, the analysis of the EU regulatory and Hungarian supervisory requirements and an assessment of credit institutions’ practices.

Suggested Citation

  • Norbert Kozma, 2020. "Principles of Proportionality in Credit Institutions’ Operational Risk Management," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(3), pages 78-101.
    • Handle: RePEc:mnb:finrev:v:19:y:2020:i:3:p:78-101
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    References listed on IDEAS

    as
    1. Dániel Homolya, 2011. "Operational risk and its relationship with institution size in the Hungarian banking sector," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 6(2), pages 7-17, June.
    2. Dahen, Hela & Dionne, Georges, 2010. "Scaling models for the severity and frequency of external operational loss data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1484-1496, July.
    3. Na, H.S. & Couto Miranda, L. & van den Berg, J.H. & Leipoldt, M., 2006. "Data Scaling for Operational Risk Modelling," ERIM Report Series Research in Management ERS-2005-092-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
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    More about this item

    Keywords

    banking regulation; operational risk; principles of proportionality; supervision;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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