Operational Risk

Operational risk is the part of financial risk. Before knowing the meaning of operational risk, we should know what is operation? Operational word is taken from the word operate, it means to activate. To activate the business is operation and when business is being done by businessman, all risks of loss will include in operational risk. Suppose, A businessman is operating is small shop. It is the risk that customers will take commodities without permission or loss due to fraud by employee. It may be possible that we appoint a new employee as cashier and next day, he runs away by taking all our cash. Except these minor risks, all other major terrorism attack risk may be included in operational risk. Main reason of these risks is not use perfect and strategic business decision. Some of operational risks are out of control of businessman.


Following is the list of these operational risks

1. Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking of positions, bribery.

2. External Fraud- theft of information, hacking damage, third-party theft and forgery.

3. Employment Practices and Workplace Safety - discrimination, workers compensation, employee health and safety.

4. Clients, Products, & Business Practice- market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning.

5. Damage to Physical Assets - natural disasters, terrorism, vandalism.

6. Business Disruption & Systems Failures - utility disruptions, software failures, hardware failures.

7. Execution, Delivery, & Process Management - data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets.

8. Events such as the September 11 terrorist attacks, rogue trading losses at Societe Generale, Barings, AIB. link

Related: Commodity Risk