Principle of proportionality

Term relating to pillar 2 of the own funds provisions. The obligation to establish an ICAAP exists regardless of the size and complexity of a credit institution, although its specific design, on the other hand is determined in accordance with the principle of proportionality. In this way it is the institution’s obligation to determine the adequacy of methodologies, systems and processes within the ICAAP. The assessment of the adequacy is determined by the type (risk profile and complexity) and the scope of business activities.
Smaller institutions, which primarily conduct business activities with a low level of risk, are able to fulfil the requirements in an appropriate manner with simpler methodologies, which are based on the principles of the ICAAP. For institutions which conduct very complex business activities, of whose business volume is very high, it may be necessary to deploy accordingly complex systems in order to satisfy the requirements under pillar 2.
The decision regarding which systems are sensible and appropriate for the respective institution in which area, should be taken on the basis of the respective individual risk structure. The credit institution should decide for itself on the basis of indicators, as well as in which areas it should deploy more complex risk measurement or control procedures, as in which areas more simple methods would be adequate.

The principle of proportionality is also anchored in several places within the Solvency II regime in the insurance sector:

–       The Member States ensure that the regulations of the Solvency II Directive are applied in a nature and manner that are appropriate for the nature, scope and complexity of the risks, which arise from the activities of the insurance or reinsurance undertaking.

In the Regulatory Technical Standards issued by the European Commission the principle of proportionality is also taken into consideration, in order to guarantee the proportional application of this Directive in particular for small insurance undertakings. The Governance System implemented in the undertaking should be appropriate for the nature, scope and complexity of activities.