What does 'operational risk' refer to?

Operational risk refers to the potential for loss resulting from inadequate or failed internal processes, systems, or external events. This definition encompasses a broad range of risks that arise from the day-to-day operations of a firm, including human error, fraud, system failures, and even external events such as natural disasters or external cyber attacks.

The focus of operational risk is on the internal mechanisms and external influences that can disrupt normal business operations, potentially leading to financial loss or reputational damage. As such, it fundamentally captures the essence of how organizations manage their internal procedures and prepare for unexpected external incidents.

This understanding of operational risk is crucial for financial institutions and other businesses, as it underpins their ability to maintain consistent operations and protect their assets.