What does operational risk refer to?

Operational risk refers to the potential for loss resulting from inadequate or failed internal processes, people, or systems. This can include a variety of factors such as human error, system failures, fraud, or inadequate internal controls. Operational risk encompasses issues arising from an organization’s own operations and is distinct from other categories of risk, such as market risk or credit risk.

The focus on internal operations is crucial because it highlights the importance of having robust processes and well-trained personnel. Poor operational practices can lead to significant losses, not just financially but also in terms of reputation and customer trust. Understanding operational risk allows organizations to implement better controls and procedures, ultimately enhancing their overall risk management strategy.