Operational Risk arises from errors that can be made in instructing payments or settling transactions. In practice, all institutions are exposed to it, while the sources are ample and diverse. Operational risk, unlike credit or market risk, does not yet have a universally accepted definition. Several groups, including the International Swaps and Derivatives Association, the British Bankers’ Association, and the Basle Committee on Banking Supervision, describe it as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events (Culp, 2001).” This definition includes legal risk but excludes strategic, reputational, and systemic risk. However, some banks define operational risk as all risk not categorized as credit or market risk, or as the risk of loss arising from human or technological error (Basle Committee, 1999). In general, operational risk includes the four key elements: people risk, technology risk, process risk, and strategic risk.
