Risk glossary

 

Operational risk

The risk that a firm’s internal practices, policies and systems are not adequate to prevent a loss being incurred, either because of market conditions or operational difficulties. Such deficiencies may arise from failure to measure or report risk correctly, or from a lack of controls over trading staff. Although operational risk is harder to define precisely than market or credit risk, it is considered by many to have been a contributor to some of the highly publicised losses of recent years.

Along with market risk and credit risk, operational risk is one of three components of the first pillar of capital requirements for credit institutions (banks) under Basel II.

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