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Operational risk in the context of banks refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. This includes legal risk but excludes strategic and reputational risk. Unlike credit and market risk, which arise from external economic changes or borrower behavior, operational risk originates internally and can stem from human error, fraud, system failures, or natural disasters. The Basel Committee on Banking Supervision (BCBS), which provides international banking regulatory frameworks, has categorized operational risks to help banks identify, measure, monitor, and control them. The Basel II and Basel III accords emphasize the importance of operational risk management (ORM) as a key component of overall risk management. ### Types of Operational Risks as Categorized by the Basel Committee: The Basel Committee identifies seven event-type categories for operational risk. These are designed to help banks develop data collection and monitoring systems that are comprehensive and standardized: 1. Internal Fraud: Losses due to acts of a type intended to defraud, misappropriate property, or circumvent regulations, the law or company policy, excluding diversity/discrimination events, which involve at least one internal party. Examples include intentional misreporting of positions, employee theft, and insider trading. 2. External Fraud: Losses ____ __________ ________ _____ _________ _____ ______.
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