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- ?Lv 42 decades agoFavorite Answer
According to §644 of International Convergence of Capital Measurement and Capital Standards, known as Basel II, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Although the risks apply to any organisation in business it is of particular relevance to the banking regime where regulators are responsible for establishing safeguards to protect against systemic failure of the banking system and the economy. The Basel II definition includes legal risk, but excludes strategic risk: i.e. the risk of a loss arising from a poor strategic business decision. This definition also excludes reputational risk (damage to an organisation through loss of its reputation or standing) although it is understood that a significant but non-catastrophic operational loss could still affect its reputation possibly leading to a further collapse of its business and organisational failure.
Examples of operational risk include:
business premises becoming unavailable
inadequate document retention or record-keeping
poor management, lack of supervision, accountability and control
errors in financial models and reports
attempts to conceal losses or make personal gains (rogue trading)
third party fraud
It is relatively straightforward for an organisation to set and observe specific, measurable levels of market risk and credit risk. By contrast it is relatively difficult to identify or assess levels of operational risk and its many sources. Historically organisations have accepted operational risk as an unavoidable cost of doing business.