Short definition: Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
Explanation: It encompasses a wide range of potential losses arising from errors, fraud, system failures, natural disasters, or any other event that disrupts a company’s operations. Operational risk is inherent in every business and can have a significant impact on a company’s financial performance and reputation.
Example: A company’s IT system might experience a cyberattack that results in data loss and disruption of operations, leading to financial losses and damage to the company’s reputation.
Additional information (optional): Operational risk management is crucial for companies to identify, assess, and mitigate potential risks. It involves establishing internal controls, implementing risk mitigation strategies, and having contingency plans in place to respond to unexpected events.