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What is Operational Risk?

Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, systems, or external events. It is the risk of disruption, financial loss, or damage to reputation that arises from operational failures within an organization.

Operational risks can manifest in various ways and impact different areas of an organization, including:

  1. Internal Processes: Inefficient or flawed internal processes, such as errors in transaction processing, inadequate controls, or breakdowns in operational workflows, can lead to financial losses, customer dissatisfaction, or compliance breaches.

  2. People and Human Error: Risks associated with human actions or behavior, including errors, misconduct, inadequate training, or unauthorized activities, can result in operational disruptions, financial losses, or reputational damage.

  3. Systems and Technology: Failures or disruptions in systems, technology infrastructure, data breaches, cybersecurity incidents, or inadequate IT controls can lead to operational failures, data loss, service interruptions, or compromised customer information.

  4. External Events: Operational risks can arise from external events such as natural disasters, political instability, regulatory changes, supply chain disruptions, or cyber-attacks. These events can impact an organization’s operations, services, or financial stability.

Managing operational risks involves identifying, assessing, and mitigating risks through effective risk management practices. This includes implementing robust internal controls, risk mitigation strategies, monitoring and reporting mechanisms, and business continuity plans to address potential risks and minimize their impact.

Many industries and regulatory bodies have specific frameworks and guidelines in place to manage operational risks effectively. For example, in the financial sector, operational risk management is a key component of regulatory frameworks such as the Basel Accords.

Organizations need to continuously monitor and adapt their risk management practices to address emerging operational risks, evolving technologies, and changing business environments. By proactively identifying and managing operational risks, organizations can enhance their resilience, protect their assets, and maintain the trust and confidence of stakeholders.