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Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, or from external events. It is one of the most significant risks faced by banks because banking operations involve a large number of transactions, complex technology, human intervention, regulatory compliance, and interactions with customers. Unlike credit risk and market risk, which arise mainly from lending and investment activities, operational risk originates from the day-to-day functioning of the bank. The Basel Committee on Banking Supervision defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events, including legal risk, but excluding strategic and reputational risk. However, operational failures often indirectly affect a bank's reputation and strategic position. The importance of operational risk has increased with the rapid expansion of banking services, digital banking, mobile payments, online transactions, artificial intelligence, cloud computing, and financial technology integration. Banks today process millions of transactions every day, making them vulnerable to errors, fraud, cyberattacks, and technological failures. Therefore, operational risk management has become an essential component of enterprise risk management. One of the major sources of operational risk is people risk. Employees play a crucial role in banking operations, and their actions can create significant risks. Human errors such as incorrect data entry, improper documentation, inaccurate calculations, or failure to follow established procedures may lead to financial losses. Employees may also engage in fraudulent activities such as embezzlement, unauthorized trading, theft of customer information, or manipulation of accounts. Lack of employee competence, inadequate training, poor supervision, negligence, and unethical behaviour further increase operational risk. Insider fraud is particularly dangerous because employees often have direct access to sensitive systems and confidential information. Another important source is process risk. Banks rely on numerous operational processes for loan processing, customer verification, account management, payment settlement, treasury operations, compliance reporting, and risk assessment. Weak internal controls, poorly designed procedures, lack of segregation of duties, inadequate authorization mechanisms, and ineffective monitoring can result in operational failures. Errors in loan documentation, delayed transaction processing, incorrect account reconciliation, and deficiencies in compliance procedures may expose banks to financial and legal consequences. Standardized operating procedures and regular process reviews are necessary to reduce such risks. System risk is another ___ ____ ___ __________ __________ _____ _______ __________ __________.
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