What is Operational Risk? Explain the types of Operational Risk as identified by Basel Committee.

What is Operational Risk? Operational risk has been defined by the Basel Committee on Banking Supervision as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition is based on the underlying causes of operational risk. It seeks to identify why a loss happened and at the broadest level includes the breakdown by four causes: people, processes, systems and external factors. Types of Operational Risk as identified by Basel Committee: The Basel Committee has identified the following types of operational risk events as having the potential to result in substantial losses: Internal fraud: For example, intentional misreporting of positions, employee theft, and insider trading on an employee's own account. External fraud: For example, robbery, forgery, cheque kiting, and damage from computer hacking. Employment practices and workplace safety: For example, workers compensation claims, violation of employee health and safety rules, organized labour activities, discrimination claims, and general liability. Clients, products and business practices: For example, fiduciary breaches, misuse of confidential customer information, improper trading activities on the bank's account, money laundering, and sale of unauthorized products. Damage to physical assets: For example, terrorism, vandalism, earthquakes, fires and floods. Business disruption and system failures: For example, hardware and software failures, telecommunication problems, and utility outages. Execution, delivery and process management: For example: data entry errors, collateral management failures, incomplete legal documentation, and unauthorized access given to client accounts, non-client counterparty mis-performance, and vendor disputes etc.