What Are Sources of Operational Risk? | KnowledgeCity

This video is from the Operational Risk Management for Banks online training course. Click here to view full course: www.knowledgec... While operational risk is inherent in every banking activity, the challenge lies in properly identifying and managing it to minimize losses. Typically, operational risks are categorized into four main types: People risk, Process risk, System risk And external event risk. The actions or inactions of people can lead to operational disruptions. For instance, a bank teller might mistakenly process a deposit incorrectly, or a trader could engage in unauthorized trading. There’s also the risk of employees failing regulatory compliance, which could result in legal penalties and damage to the bank’s reputation. Training and supervision are key in mitigating people risks, but even the best-prepared institutions can find themselves vulnerable to human fallibility. Process risk involves flaws or failures in the bank’s internal processes that could lead to losses. Process risks are often linked to inadequate or failed internal procedures, policies, and controls. For instance, if a bank doesn’t perform due diligence, it might approve a loan for an uncreditworthy borrower, leading to potential defaults and financial losses. In today's digital age, banks rely heavily on technology for operations. When these systems fail or are breached, the consequences can be severe. For instance, a software bug in the trading platform can result in incorrect trading orders, or a failure in the banking software can disrupt daily operations, affecting transactions across the board. Cyberattacks pose a significant threat because they can result in data breaches and losing sensitive customer information. Maintaining robust IT systems and investing in state-of-the-art cybersecurity measures are essential strategies to safeguard against system risks. External event risk includes those risks that are beyond the direct control of the bank but can cause substantial operational disruptions. These include natural disasters such as earthquakes or floods that damage physical infrastructure. Political instability or changes in regulatory frameworks can also be categorized under external event risks. For instance, new regulatory requirements might necessitate changes in operations or impose additional compliance costs. Banks need to have contingency and disaster recovery plans in place to manage the impacts of these external risks effectively. To develop effective risk management strategy, you need to understand these sources of operational risk. If you implement risk management frameworks, you better safeguard your bank’s operations and maintain its integrity and profitability.
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