A moving target – the first pillar of the capital requirements directive

Gabriella Lamanda and Alíz Zsolnai

Public Finance Quarterly, 2010, vol. 55, issue 1, 162-176

Abstract: In the summer of 2006, the Capital Requirements Directive was approved by the European Union based on the Basel recommendations, which determines, among others, such actions, rules and guidelines for the risk management and capital generation of the credit institutions that are under the effect of the accord which are better suited to the dynamically changing operating environment. As compared to the preceding regulation, the Capital Requirements Directive contains significant changes with regard to the management of lending risks. The various kinds of methodologies allow the institutions of various sizes and profiles to choose the methodology that best suits their activities and sizes. Getting prepared and applying the methods are important tasks, however, the considerable decrease in the capital requirements, which arises from the sophisticated nature of the method, encourages the shifting of the institutions in this direction. Operating risks are a new element of the regulation, which is quite difficult for the institutions to tackle. The primary reason for this is explained by the characteristic features of operating risks. It is a relevant question how those events which occur with a high frequency but incur low losses and those events which occur only seldom but involve serious consequences can be detected, forecast and with which tools they can be managed. Since the banks are now only taking the first steps in the management of operating risks, it is impossible to give a clear answer to this question but it is obvious that if we wish to keep the risks within a controllable limit, we should apply new methods besides those that have been well-proven and well-established to date, and a kind of new approach will also be necessary. In our article, we will examine the issues related to the management and regulation of these risks by also taking the circumstances of the Hungarian financial market into account.

Date: 2010
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