Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems, human errors, or external events.
Meaning in Practice
Operational risk includes fraud, cyberattacks, system outages, and processing errors. It arises from internal weaknesses or unexpected external disruptions. Institutions implement internal controls, audits, and contingency planning to reduce exposure.
Why It Matters
Operational failures can lead to direct financial losses and regulatory penalties. They also damage reputation and customer trust. Strong governance and risk frameworks are essential to mitigate operational vulnerabilities.
Market Impact
Major operational incidents, such as cybersecurity breaches, can trigger share price declines and increased compliance scrutiny. Investors may reassess management quality and internal controls. Systemic operational failures can affect broader market stability.
Example
A prolonged IT outage prevents customers from accessing online banking services, resulting in financial losses and regulatory investigation.