Operational risks are those risks related to failures in day to day operations. They are different from other kinds of risks such as credit risk, or market risk.
Operational risks are about things going wrong resulting in losses. For example, a small grocery might encounter the following problems:
- Shoplifters
- Giving too much change to a customer
- A car crashing through the shop
- A customer slipping and hurting themself.
- Goods not the right one
- Counterfeit money
- Robbers
- Fire
- Employee theft
Other kinds of risks are not considered operational risks:
- Another shop opening nearby, drawing some of the customers
- A bank calling on the loan
- Interest rates going up
- Prices of goods going up
Operational risks are about failures of people, systems, and processes, and about external events.
The risk brought about by operational risk, like any risk, depends on the likelihood of occurrence, and the consequences it brings. These costs need to be balanced by costs related to mitigating the risk. For example, the risk of being robbed may be mitigated by hiring guards to secure the store, but will the cost of hiring them be higher than the cost of being robbed, once or twice a year?
The cost of being passed counterfeit bills may be mitigated by installing a counterfeit checking device, but will that cost more?
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