Discuss operational risk with examples
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
According to Bangladesh Bank guidelines, it is the risk of unexpected losses due to physical catastrophe, technical failure, and human error in the operations of a bank, including fraud, failure of management, internal process errors, and unforeseeable external events.
Operational risk is present in all activities of a bank, from the Board of Directors down to the desk officer. It is not limited to the back office or operations department. Every transaction, every system, every employee, and every process carries some level of operational risk.
Examples of Operational Risk
- Internal Fraud: A bank employee manipulates the loan system to disburse funds into a fictitious account. Example: intentional misreporting of positions, employee theft, or insider trading.
- External Fraud: a criminal uses a forged cheque to withdraw funds from a customer’s account. Example: cheque kiting, forgery, robbery, or computer hacking.
- Process Failure: a bank disburses a loan without completing the collateral documentation — exposing itself to unrecoverable losses if the borrower defaults.
- System Failure: The core banking system goes offline during peak hours, preventing customers from transacting and causing reputational damage.
- Natural Disaster: a flood destroys a branch building and all physical records — disrupting operations and causing asset losses.
- People Risk: an inexperienced officer processes an incorrect foreign exchange transaction, causing a financial loss due to human error.
