operational risk
The risk of loss from failed internal processes, people, systems, or external events — including fraud, technology failures, and natural disasters.
Example
“The bank's rogue trader represented operational risk — a human failure that caused $2 billion in losses despite risk controls.”
Memory Tip
OPERATIONAL RISK = risk from internal failures. People, processes, systems going wrong.
Why It Matters
Operational risk affects the safety of your money and personal financial information at banks, investment firms, and financial institutions you trust. Understanding this risk helps you evaluate whether a financial institution has strong safeguards to protect your accounts and data from errors, theft, or system failures.
Common Misconception
Many people think operational risk only applies to large banks and corporations, but it also affects small financial institutions, payment processors, and fintech companies. Individual investors and account holders face real losses when operational failures occur, so this risk is relevant to anyone managing money.
In Practice
A major bank experiences a cyberattack that temporarily freezes customer accounts and prevents access to funds for two days, causing some customers to miss bill payments and incur overdraft fees totaling thousands of dollars. The bank must compensate affected customers and implement new security systems costing millions, demonstrating how operational failures directly impact account holders financially and operationally.
Etymology
OPERATIONAL (relating to day-to-day operations) RISK. RISK from internal OPERATIONAL failures.
Common Misspellings
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Related Terms
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See Also
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