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OPERATIONAL RISK

OPERATIONAL RISK MANAGEMENT

Risk is inherent in any walk of life in general and in financial sectors in particular. Till recently, due to regulated environment, banks could not afford to take risks. But of late, banks are exposed to same competition and hence are compelled to encounter various types of financial and non-financial risks. Risks and uncertainties form an integral part of banking which by nature entails taking risks. There are three main categories of risks; Credit Risk, Market Risk & Operational Risk. 


Operational risks are risks that every organization confronts. Generally, an operational risk is a risk that comes about from a company's execution of its business functions. The term operational risk is typically a broad term and includes some of the following; fraud risks, legal risks, physical or environmental risks. More specifically, operational risk can be defined as the risk of loss or incident resulting from insufficient or unsuccessful internal processes, people and systems, or from external events. Operational risk, though defined as any risk that is not categorized as market or credit risk, is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. 


Always, banks live with the risks arising out of human error, financial fraud and natural disasters. Operational risk involves breakdown in internal controls and corporate governance leading to error, fraud, performance failure, compromise on the interest of the bank resulting in financial loss.


In order to mitigate this, internal control and internal audit systems are used as the primary means. Risk education for familiarizing the complex operations at all levels of staff can also reduce operational risk. Using solutions that manages or reduces operational risk is one of the important mitigators. Insurance cover is also an important mitigator of operational risk. The key to management of operational risk lies in the bank’s ability to assess its process for vulnerability and establish controls as well as safeguards while providing for unanticipated worst case scenarios.

 

 

 

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