Operational Risk

Operational Risk

Operational risk is one of the major categories of financial risk, alongside credit risk and market risk. It refers to the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events.

In the context of financial risk management, operational risk includes risks associated with fraud, legal and regulatory compliance, errors or omissions, technology failures, and other events that could impact a financial institution’s ability to operate effectively and efficiently. These risks can lead to financial losses, damage to reputation, or other negative consequences.

Effective management of operational risk is critical for financial institutions, as failures in this area can have significant consequences. Risk management frameworks and processes typically include identification and assessment of operational risks, development and implementation of risk mitigation strategies, and ongoing monitoring and reporting of risk exposure.

Financial institutions may also use various tools and techniques to manage operational risk, such as internal controls, risk transfer mechanisms (e.g., insurance), and contingency planning. The goal of operational risk management is to minimize the likelihood and impact of operational failures, while still allowing the institution to pursue its business objectives in a prudent and sustainable manner.

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