Operational risk in banking refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. It is a distinct risk category that can shape the risk profiles of financial institutions. Operational risk is different from systematic risk and financial risk. It can affect any business line or function in a bank, such as lending, trading, compliance, IT, or human resources. Some examples of operational risks in banking include processing errors, internal and external fraud, legal claims, business disruptions, cybersecurity risks, and technology glitches.

To manage operational risk, banks and other financial institutions must evaluate and manage it through various tools and mitigation strategies. The following are some key steps and best practices to help manage operational risk in banking:

• Identify operational risks: This involves fostering a culture of risk awareness where employees at all levels are encouraged to report potential risks. Cross-functional teams can be formed to brainstorm and identify potential operational risks.

• Assess operational risks: This involves identifying and documenting operational risks that are specific to the organization. The potential impact of each identified risk on the organizations operations, financials, and reputation should be evaluated.

• Monitor and control operational risks: This involves implementing controls to mitigate identified risks. The effectiveness of these controls should be monitored and reviewed regularly.

• Report operational risks: This involves reporting operational risks to senior management and the board of directors. The reporting should be timely, accurate, and comprehensive.

Operational risk management is an evolving discipline that requires continuous improvement and adaptation to changing risk landscapes.