Operational risks are the potential losses and negative social performance associated with the day-to-day operations of a business. They can be caused by internal or external fraud, unsafe work practices, customer and product issues, and more. It is essential for organizations to understand the different types of operational risks and how to mitigate them in order to protect their interests. Risk for individuals is the risk of financial losses and negative social performance related to insufficiencies in human capital and human resource management.
Internal fraud is when acts of fraud are committed internally in an organization, such as theft, bribery, embezzlement of assets, forgery, and deliberate falsification of positions. External fraud is activities committed by third parties, such as theft, check fraud, and violation of system security. Work practices and safety in the workplace are also a major operational hazard. Organizations must comply with labor or health and safety laws and regulations in order to protect their interests.
Customers, products, and business practices can also lead to losses if promises are not kept or if there are privacy or fiduciary breaches, misuse of confidential information, eligibility issues, market manipulation, money laundering, unlicensed activities, product defects, unfair competition, harm to customers, or misleading information about products. Data entry errors, miscommunication, missed deadlines, accounting errors, inaccurate reports, incorrect customer records, negligent loss of customer assets, and disputes with suppliers are all operational risk events that could pose legal threats to the organization. Execution, delivery, and process management can also lead to losses if not managed properly. Unsystematic risk is a type of operational risk that is specific to a certain industry or company.
Companies can manage operational risk by eliminating processes that do not reward the company but only entail unnecessary risk. Educating employees on how to analyze and manage operational risks on a daily basis is also important. Finally, setting risk indicators accordingly can help bankers mitigate operational risks efficiently.
