⚙️ Operational Risk

Explore risks from internal processes, systems, or human errors.

Introduction

Operational risk arises from failures in internal processes, systems, or people.
Unlike market or credit risk, it is tied to the day‑to‑day functioning of an organization.

Core Principles

  • Process Integrity: Strong internal controls reduce operational risk.
  • System Reliability: IT infrastructure and automation must be resilient.
  • Human Factors: Training and oversight help prevent costly mistakes.

How It Works

  1. Identify Weaknesses: Audit processes, systems, and staff responsibilities.
  2. Implement Controls: Segregation of duties, monitoring, and compliance checks.
  3. Plan for Continuity: Disaster recovery and backup systems mitigate disruptions.

Advantages of Understanding Operational Risk

  • Improves organizational resilience.
  • Reduces losses from fraud, errors, or system failures.
  • Builds trust with regulators and stakeholders.

Risks

  • Fraud: Internal misconduct can cause significant losses.
  • System Failures: Outages disrupt operations and revenue.
  • Human Error: Mistakes in judgment or execution can be costly.

Famous Examples

  • Barings Bank Collapse (1995): Rogue trading led to bankruptcy.
  • Knight Capital (2012): Software glitch caused $440M in losses in 45 minutes.

Conclusion

Operational risk is often underestimated but can be devastating.
Strong controls, reliable systems, and effective oversight are essential to manage it.