Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. EU legislation requires institutions to properly manage and mitigate operational risk, which is defined as the risk of losses resulting from inadequate or faulty processes, people and internal systems or from external events. Operational risk includes legal risks, but excludes reputational risk, and is embedded in all banking products and activities. It has always existed in banking and non-banking organizations, but it has acquired greater relevance due to the growing complexity and globalization of the financial system and the recent materialization of extremely large and unprecedented losses.
By publishing its guidelines and strategic strategy on operational risk, the EBA aims to promote and improve the effectiveness of the management and supervision of operational risk throughout the banking system. For companies to make the best decisions, it's often better for top management to make the decisions about how to address operational risk. This will involve the adoption of more agile ways of working, with a greater use of interdisciplinary teams that can respond quickly to problems that arise, to quasi-accidents and to emerging risks or threats to resilience. The overall goal is to create an operational risk function that encompasses agile development, data exploration, and interdisciplinary teamwork.
As the year progresses, the company will be able to assess whether the KRI objective is being met, the reasons why it is not being met, and take appropriate measures to manage that risk. Operational risk can also be classified as a variety of non-systematic risks, which are unique to a specific company or industry. As each of these aspects is time- and resource-intensive, operational risks caused by people are closely related to financial repercussions. The heat map provides risk managers with the basis for partnering with those on the front lines to develop a set of intervention programs adapted to each high-risk group.
This can range from natural disasters that prevent a company's shipping process to political changes that restrict how the company can operate. Progress will require time, investment and management attention, but the transformation of operational risk management offers institutions compelling opportunities to reduce operational risk while improving business value, security and resilience. There are several general strategies and principles when it comes to managing operational risk. The comprehensive management of these risks is called operational risk management and includes the measurement, hedging, and monetization of one or more types of operational risks.
We believe that this mandate should be expanded so that the second line is an effective partner to the first line and plays a challenging role in supporting the fundamental resilience of the model and operating processes. The journey is difficult: it requires institutions to overcome the challenges of aggregating data and creating risk analysis at scale, but it will result in more effective and efficient risk detection. Top management is often responsible for managing operational risk by being aware of existing risks and strategies to overcome them.
