Operational Risk Management in Banking: A Practitioner’s PerspectiveOperational risk is defined as “the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events” — a definition commonly accepted and propounded by the Basel Committee on Banking...

Operational Risk Management in Banking: A Practitioner’s Perspective

Operational risk is defined as “the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events” — a definition commonly accepted and propounded by the Basel Committee on Banking Supervision (BCBS).

Operational risk management refers to the entire range of activities — from risk identification, measurement, assessment, monitoring, and control/mitigation, to reporting, business continuity management, and continuous learning through feedback and technology.

Expanding the Definitiongiven above

Operational risk primarily involves processes. Inadequate processes or control deficiencies can lead to operational risk events related to people, systems, and external factors. Human error remains one of the major sources of risk events, even in today’s technology-driven world.

Technology is now all-pervasive in our lives, industries, and businesses. Simply put, without technology, there is no business.

The Nature of Operational Risk

Risk-taking in business is typically associated with the risk–reward relationship — the higher the reward, the greater the risk. However, for operational risk, there is no such risk–reward relationship.

There is no reward for taking on more operational risk; rather, exposure to risk events only increases. This principle has held true in the past and continues to apply today — whether the business is technology- or AI-driven, the logic remains unchanged.

In today’s dynamic environment, the importance of managing operational risk cannot be underestimated. Every organization, regardless of size, has people to manage its business, processes (whether simple or complex), and systems to support growing volumes of operations.

Thus, every organization — large or small — and even individuals or groups are exposed to operational risk at all times, whether on a large or small scale. For example, an individual’s risk of an accident while driving is a common instance of operational risk.

Technology and Emerging Risks

The introduction of technology in businesses has brought a different set of risks compared to people-related operational risks.

New risks include system downtime, communication failures, network unavailability, virus threats, hacking attempts, and cyberattacks on cloud-based systems — depending on the type of information systems adopted by organizations.

With the rise of artificial intelligence (AI), a new set of operational risks is emerging. These range from simple prompting code  errors to deeper algorithmic faults within the system itself. The full extent of AI-related risks is yet to unfold, therefore organizations must be prepared to address them from their  business perspective.

In conclusion

Only thing permanent in life is change, therefore be ready to adapt and achieve your business objective by managing risk.