Definition and Drivers of Operational Risk

The definition of operational risk adopted under Basel II is “Operational risk is defined as the risk of loss resulting from inadequate or failed processes, people and systems or from external events.” The four core operational risk requirements are identify, assess, control, and mitigate operational risk. The four main causes of operational risk are people, process, systems, and external events. The seven risk types are Internal Fraud; External Fraud; Employment Practices and Workplace Safety; Clients, Products, and Business Practices; Damage to Physical Assets; Business Disruption and System Failures; and Execution, Delivery, and Process Management. The 2012 London Olympics provides an opportunity to test these elements outside the financial services industry. Operational risk management and measurement have different roles to play. Operational risk is an important element in an enterprise risk management framework