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The definition of Operational Risk


Chart about the sources of Operational Risk


THE SIGNIFICANCE OF OPERATIONAL RISK (OP RISK) TO A BUSINESS

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This is the basic definition of Op Risk and is the premise of more complex and derivative definitions used by global regulatory bodies (including the Basel Committee on Banking Supervision) and private institutions.

Examples of Op Risks resulting in business losses    

External Events

  • Cyber attacks
  • Political events/changes
  • Economic downturns/crises
  • Natural events/disasters

Systems

  • Malfunction in computers
  • Damage to equipment due to a failure in electronic or non-electronic systems

Process

  • Low Process Quality due to organizational functions (ex. tasks assigned incorrectly)
  • Failure of internal communications linkages
  • Workplace Safety issues

People

  • Wrong decisions made by the Board of Directors or Management (ex. M&A, financing, other decisions)
  • Employee or other internal Fraud (whether or not electronic in nature)
  • Disputes leading to lawsuits (employment / shareholder / third party /etc.)
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