44. Operational Risk

Operational risk is one of the main topics of study in Banking Knowledge for public tenders. It is an essential concept for understanding banking operations and the challenges faced by financial institutions. Operational risk is defined as the risk of direct or indirect loss resulting from a variety of causes associated with internal processes, people, systems or external events.

According to the Basel Committee, operational risk encompasses losses resulting from failures or inadequacies of internal processes, people and systems, or from external events. This includes legal risks but excludes strategic and reputational risks. So it's a pretty broad definition that covers a range of potential risks that a bank could face.

One of the main causes of operational risk is human error. This can occur in many ways, such as data entry errors, failure to perform tasks, negligence or even fraud. For example, an employee may make a mistake when entering the details of a transaction, resulting in a financial loss for the bank.

Another major cause of operational risk is system failure. This can occur when a bank's IT systems fail, resulting in service interruptions, data loss or other negative consequences. For example, if a bank's online payment system fails, it could result in lost revenue and damage to the bank's reputation.

External events can also lead to operational risk. These can include natural disasters, such as floods or earthquakes, which can damage a bank's physical infrastructure. They may also include political or economic events that affect the stability of the banking sector.

Operational risk is managed through a combination of preventive and control measures. Preventive measures aim to prevent risks from occurring in the first place. This may include implementing strict quality control procedures, training personnel, and regularly maintaining systems and equipment.

Control measures, on the other hand, aim to minimize the impact of risks that occur. This may include implementing contingency and disaster recovery plans, insuring against certain types of risks, and regular auditing to detect and correct failures.

In addition, banks are also required to hold sufficient capital to cover potential losses resulting from operational risk. This is known as the operational risk capital requirement and is an important part of international banking regulations.

In short, operational risk is a crucial aspect of running a bank. It is essential for banks to effectively manage their operational risks to ensure long-term stability and profitability. This is even more important in today's banking environment, where banks are increasingly dependent on complex IT systems and face a variety of external challenges.

Understanding operational risk and how it is managed is therefore an essential aspect of Banking Skills for public tenders. It provides a solid foundation for understanding the challenges facing banks and how they operate.

Next page of the Free Ebook:

45Market Risk

3 minutes