What is Operational Risk?
The most commonly used and accepted definition of operational Risk is from Basel II which states that Operational Risk is the risk of loss resulting from inadequate or failed processes, people and systems and from external events.
This definition includes legal risk, but excludes strategic risk and reputational risk.
Basel II is the common name used to refer to the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework,” which was published by the Bank for International Settlements in Europe in 2004, and the framework is broadly adopted, with country level customisation as required by the countries that have been party to the accord. While this was specific only for the regulated financial institutions industry, the overall concept of operational risk remains the same irrespective of the industry.
Each and every industry, whether manufacturing, trading or in service sector, is subject to a degree of operational risk though the level of risks may differ between industry sectors, companies, the nature of products and services offered, and the actual management control over these risks.
Operational risk is an overarching concept interrelated with several other types of risks, and cannot be viewed in isolation. The most important risks linked to operational risk are risk of non- compliance to applicable laws and regulations, risk of fraud losses due to an internal or external event that takes advantage of gaps in the processes to make an unlawful gain, risk of financial losses, risk of incorrect financial reporting, and in several organisations, reputational risk is also part of the areas touched by operational risk.
Basel II is the common name used to refer to the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework,” which was published by the Bank for International Settlements in Europe in 2004, and the framework is broadly adopted, with country level customisation as required by the countries that have been party to the accord. While this was specific only for the regulated financial institutions industry, the overall concept of operational risk remains the same irrespective of the industry.
Each and every industry, whether manufacturing, trading or in service sector, is subject to a degree of operational risk though the level of risks may differ between industry sectors, companies, the nature of products and services offered, and the actual management control over these risks.
Operational risk is an overarching concept interrelated with several other types of risks, and cannot be viewed in isolation. The most important risks linked to operational risk are risk of non- compliance to applicable laws and regulations, risk of fraud losses due to an internal or external event that takes advantage of gaps in the processes to make an unlawful gain, risk of financial losses, risk of incorrect financial reporting, and in several organisations, reputational risk is also part of the areas touched by operational risk.
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