Principles of Proportionality in Credit Institutions’ Operational Risk Management

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.