Operational Risk

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Definition of 'Operational Risk'

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It is a broad category of risk that includes many different types of events, such as fraud, human error, system failures, and natural disasters.

Operational risk is often overlooked by investors and financial institutions, but it can be a significant source of losses. In fact, a recent study by the Basel Committee on Banking Supervision found that operational risk was the second-largest source of losses for banks, after credit risk.

There are a number of things that can be done to mitigate operational risk. These include implementing strong internal controls, training employees on how to identify and prevent fraud, and using technology to improve the efficiency and security of business processes.

Operational risk is a complex and ever-changing challenge. However, by taking steps to mitigate it, financial institutions can reduce their exposure to losses and protect their shareholders' value.

Here are some specific examples of operational risk events:

* Fraud: This can include employee theft, customer fraud, and financial statement fraud.
* Human error: This can include mistakes made by employees in processing transactions, entering data, or operating systems.
* System failures: This can include hardware failures, software failures, and power outages.
* Natural disasters: This can include floods, earthquakes, hurricanes, and other events that can damage property and disrupt business operations.

Operational risk can have a significant impact on a company's financial performance. For example, a fraud incident could lead to a loss of customers and revenue, while a system failure could disrupt operations and lead to lost productivity.

In order to manage operational risk, companies need to have a comprehensive risk management program in place. This program should include a risk assessment process, a risk mitigation strategy, and a risk monitoring process.

The risk assessment process should identify the key risks that the company faces and assess the likelihood and impact of each risk. The risk mitigation strategy should develop plans to reduce the likelihood and impact of each risk. The risk monitoring process should track the company's exposure to risk and identify any changes that need to be made to the risk management program.

By implementing a comprehensive risk management program, companies can reduce their exposure to operational risk and protect their financial performance.

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