Operational Risk
Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, systems, human errors, or external events. It is one of the major types of risk faced by financial institutions, along with credit risk and market risk.
Operational risk can arise from a wide range of sources, such as fraud, cyberattacks, IT failures, legal and regulatory compliance failures, and natural disasters. It is a significant concern for financial institutions, as it can lead to reputational damage, financial losses, and legal liabilities.
Effective management of operational risk is crucial for the safety and soundness of financial institutions. Financial institutions typically have formal processes in place to identify, assess, monitor, and mitigate operational risk. These processes can include risk assessments, risk mapping, scenario analysis, and stress testing.
In addition, financial institutions may implement various risk mitigation strategies, such as implementing internal controls, developing contingency plans, and purchasing insurance. Overall, effective operational risk management is an essential part of financial risk management, and it plays a critical role in maintaining the stability and resilience of the financial system.
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