Operational Risk

Operational risk covers many problems that can arise in the day-to-day running of an organisation, unrelated to market movements or borrowers defaulting.

Examples include human error, such as a trader entering the wrong number of shares in an order; fraud by employees or outsiders; failures of computer systems; cyberattacks; legal and compliance failures; natural disasters, fires or pandemics that disrupt operations; and problems with outside suppliers.

For example, a bank's payment system might crash for several hours, preventing customers from accessing their accounts, leading to compensation payments, regulatory fines and damage to the bank's reputation.

Banking regulations require banks to hold capital against operational risk, alongside credit and market risk. Organisations manage operational risk through strong internal controls, separation of duties, staff training, business continuity and disaster recovery planning, cybersecurity measures, regular audits and insurance.

Operational risk can be harder to measure than other risks, because large losses are rare and often unique. Some of the largest losses in financial history, including rogue trading scandals, have resulted from operational failures rather than market movements.