What type of risk does operational risk primarily involve?

Operational risk primarily involves human errors or lapses in processes within an organization. This type of risk is concerned with the potential for loss resulting from inadequate or failed internal processes, people, systems, or from external events. It can arise from a variety of issues, including mistakes made by employees, flaws in organizational processes, system failures, or even unforeseen external events like natural disasters.

The focus on human error reflects the reality that operational risk often stems from the actions or inactions of individuals within the organization, whether intentional or unintentional. Effective risk management in this area includes implementing robust processes, regular training, and maintaining a culture of accountability to minimize these risks. Recognizing operational risk as primarily related to internal organizational factors is crucial, as it differs significantly from other types of financial risks that are influenced by market conditions or economic changes.