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OP 2004/32 László Baki - Dr Péter Rajczy - Márta Temesvári : Assessing and Managing Operational Risks at the Magyar Nemzeti Bank

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 Abstract

Efficient management of institutional risks requires a comprehensive approach and streamlined technologies of assessment and management, exercised within adequate institutional structures. The goal of the Bank for International Settlements (BIS) is to develop these technologies at an international level through its recommendations in “International Convergence of Capital Measurement and Capital Standards” (commonly known as Basel II), which aims to promote the transparent and prudent operation of financial institutions. The new system of recommendations to replace Basel I pays special attention to operational risks with regard to certain loss events that have attracted great attention (Barings Bank, Enron, etc.). The methodology recommended for measuring operational risks is fundamentally new, the details not yet refined, and it serves as a basis for debate. Despite this, financial institutions increasingly deal with this issue on the basis of the First Pillar on minimum capital requirements. Not only large banks with international networks, primarily targeted by Basel II, work out methods to assess their operational risks, so do central banks, for which those requirements do not apply. This is why Magyar Nemzeti Bank, The Central Bank of Hungary (MNB) began the overview and assessment of its operational risks, thereby providing a new ground for operational risk management. During the process of the bank-wide operational risk assessment and the comprehensive review of one of the most essential risk management tools, business continuity planning (BCP), the organisation might possibly consider the related tasks as involving excessive work.

The present study gives a description of the operational risk assessment system worked out in the MNB, and of its interrelations with the management of these risks. We would like to show that this has always been an integral part of the general activities of the bank – but now we use a different approach. There is a systemic approach in the background and the methodology is adjusted accordingly.

 OP32