Operational risk within the context of FAIR encompasses losses that arise from failed processes, systems, or external events. This type of risk is fundamentally linked to the day-to-day operations of an organization, and it captures various scenarios where internal processes may not function as intended or where external factors impact those operations.
For example, operational risk can manifest through incidents such as system outages, process failures, supply chain disruptions, or any unforeseen events that hinder the normal functioning of an organization. These risks are distinct from other types of financial risks, such as those arising from market shifts or employee-related issues, because they focus on the internal capabilities and processes rather than external market dynamics or human resources.
Understanding operational risk is crucial in effectively managing an organization’s risk profile, as it can have significant implications on operational continuity and overall business performance. By identifying and mitigating these risks, organizations can bolster their resilience against potential losses caused by operational failures.