• Operational Risk

    For a bank, Operational risk arises from unexpected internal or external operations related events. The unexpected operational events can occur from failed internal processes, failed transactions, human or system errors and loss of data due to some natural disaster or hazards, which all result in loss for the bank.

    Operational risk can arise from both internal and external risk factors which need to be monitored and managed properly in order to reduce loss from the same.

    Internal Operational risk factors

    Human Resource Related risk factors are

    • Employee error
    • Employee fraud or misdeed
    • Loss of key employees
    • Failure to follow the employment law properly
    • Health and safety related issues with the employees

    Process related risk factors are

    • Accounting and Reporting error which represents important financial numbers wrongly
    • New Product or project risk which fails to deliver as promised/expected
    • Settlement and payment related error
    • Transaction error
    • Audit related error which fails to identify mistakes
    • Legal or contract related error regarding loan agreements and other contracts

     System related risk factors are

    • System failure leads to loss of data
    • Programming errors/bugs lead to incorrect data or transaction
    • Security related issues or fails to protect sensitive customer information
    • Failure to have proper data backup leads to loss of important data
    • System Compatibility error
    • Lower data quality due to poor database management processes
    • Lower system capacity or system not able to handle huge data

    External Operational risk factors

    Main external operations risk factors or unexpected events are

    • Legal or compliance error
    • Regulatory risk arising out of new regulations imposed by appropriate authority
    • Supplier risk or failure to procure proper supply on time
    • Fire or Natural disaster causing of loss in asset or data
    • Physical security related errors
    • Theft of money

    Banks not only keep money from the customer but they also store very sensitive information about all of them. To protect both the data and money, banks should have appropriate risk management processes to handle all the possible operational risks mentioned above.

    Post Tagged with ,

Leave a Reply

Your email address will not be published. Required fields are marked *