Operational risk in the banking system is not a new concept. Only recently, however, has it been elevated to a distinct risk category that can shape the risk profiles of financial institutions. This elevation is mainly due to the Basel Committee on Banking Supervision (BCBS).

In one of its papers, the BCBS defines operational risks for banks as “the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events.”

Since the global financial crisis in 2008, financial institutions have established advanced systems to control financial risk. Alas, they haven’t been able to deal with operational risk as effectively. One reason is that operational risk is more complex, involves many risk types, and is not always easy to measure. Another is that active risk management requires advanced visibility into diverse processes and activities across the organization.

Banks and other financial institutions must evaluate and manage operational risk through various tools and mitigation strategies.

Operational Risks vs. Strategic Risks

In banking (as in other industries) operational risk is often confused with strategic risk. The two concepts actually are distinct and should be managed as such.

Strategic risks arise when an initial business strategy fails to deliver the expected objectives, affecting the financial organization’s progress and development. Such risks can be created due to a technological change, the entry of a new competitor, or changes in consumer demand.

The different types of operational risk, on the other hand, arise from failed internal procedures, employee errors, breaches, fraud, or external events that disrupt operations.

Top Operational Risks in Banking and Financial Services

New business models, complex value chains, regulatory challenges, and increasing digitization have created unknown operational risks for banks in recent years. These include:

Cybersecurity Risk

Even as financial institutions ramp up their cybersecurity efforts, cyber risks, including ransomware and phishing, have become more frequent and influential, affecting their operational continuity.

This is especially true in the post-pandemic world where threat actors leverage security weaknesses in firms’ IT infrastructure to perpetrate serious (and profitable) cyberattacks.

Third-Party Risk

Financial institutions are increasingly relying on third-party providers, which means they must identify, evaluate, and control third-party risks throughout the lifecycle of their relationships with those companies.

With that increasing digitization and hyper-connectivity, however, banks must also worry about the fourth parties that do business with their third parties; those risks must also be identified, evaluated, and managed.

Internal Fraud and External Fraud

According to one survey, almost 40 percent of mid-sized and large digital financial services organizations experienced an increase in fraud in 2020. Operational risk losses from internal scams can stem from asset misappropriation, forgery, tax non-compliance, bribes, or theft.

Fraud committed by external parties includes check fraud, theft, hacking, system breaches, money laundering, and data theft. The risk of both internal and external frauds arises from diverse factors, including the massive growth in transaction volumes, the availability of sophisticated fraud tools, and the security gaps created by increasing digitization and automation.

Business Disruptions and Systems Failures

Hardware or software system failures, power failures, and disruption in telecommunications can interrupt any financial organization’s business operations and lead to financial loss.

In addition to the operational risks identified above, other risk or loss events could harm financial companies, increase reputational risk, or lead to legal problems. These include:

  • Missed deadlines;
  • Accounting or data entry errors;
  • Vendor disagreements;
  • Inaccurate client records;
  • Loss of client assets through negligence;
  • Operational losses.

Losses from operational risks can devastate a financial firm. They can also harm its business continuity, reputation, and compliance position.

As the financial services landscape becomes increasingly complex, banks and other financial companies must control operational risk by adjusting their risk management strategies, systems, and procedures.

See also

How to Build a Risk Management Plan

Some common terms and definitions that are key to understand compliance

How Do You Identify Operational Risk in Banks?

Operational risks will come from the overlap of people, processes, and technology within a banking organization, especially potential human errors across all three. It’s best to consider those intersections when using one of the following tactics for identifying operational risks:


Gather key stakeholders and senior management for short, focused sessions of brainstorming potential operational risks. These sessions are best left solely for identification, and leaders should plan to avoid the temptation to dig into analyzing or mitigating the suggested risks.

Risk-based audit

This critical component of enterprise risk management can help not only to identify potential operational risks, but also serve as an evaluation of the bank’s current risk management framework. Once identified, potential risks can be plotted on a risk assessment matrix to determine their priority before moving to the scenario analysis and implementation phase.

Identify critical dependencies

Banks may be staring operational risks in the face every day and just don’t realize it, because the risks are disguised as critical dependencies. Critical dependencies are tasks and processes that must happen in a particular order to succeed. If these aren’t carried out, banks can run into delays, breaches, and other operational risks.

It’s important to not rush this phase in the management of operational risk. Failure to identify potential risks increases the likelihood of those events taking place with no fail-safes or protocols, leaving the banking institution vulnerable to risk exposure.

Operational Risk Management in Banking

Operational risk management should be at the center of every financial institution’s operations. This ongoing process involves risk assessment, risk decision-making, and adopting internal controls to mitigate or avoid different kinds of risk, including:

  • Behavioral risk;
  • Cyber risk;
  • Credit risk;
  • Compliance risk;
  • Regulatory risk;
  • Third-party risk.

These business practices and controls must be incorporated into the firm’s systems, processes and culture, so it can continue to operate effectively, execute business strategy, and prevent large-scale or severe risk issues.

It’s also crucial to refocus on boosting business resilience and addressing critical vulnerabilities by adopting data-driven risk measurement and real-time monitoring.

Operational Risk Management Strategies for Banks and Financial institutions

In the financial sector, operational risk management can help create more secure and profitable organizations. This requires risk managers to build an effective operational risk management program by following these strategies:

Evaluate the Risk Profile

To reduce operational risks and improve information security, every financial company should evaluate its risk profile. It should also assess the resiliency of its business processes, map them to associated risks and controls, and create a database of potential operational risk events.

Develop Key Risk Indicators

Key risk indicators can alert leadership to potential issues. The real-time testing of operational processes, controls, and risk metrics can provide visibility into determinants of risk levels, such as spikes in transaction volumes and any areas operating under stress. Organizational leaders can then use these risk indicators to identify, categorize, and mitigate risks.

Employee Training

To assure the effectiveness of the operational risk management program, employees must be made aware of potential risks. This is especially important when a business unit is about to do something new, such as change a customer interface, roll out a new product or service, or adopt business process outsourcing.

Combine Cybersecurity with Operational Risk Modeling

Operational risk and cybersecurity risk are intrinsically linked because of the extensive impact a potential data breach can have on the financial organization’s operations.

As such, combining cybersecurity best practices with operational risk modeling objectives can help these firms develop better plans to prevent, mitigate, and remedy operational risks.

Controlling Operational Risks for Banks with Technology

ZenRisk is a governance, risk management, and compliance platform. It provides easy-to-use operational risk management templates to assist in the evaluation of risk on a comprehensive level. Plus, our user-friendly dashboard shows you where gaps exist in your risk mitigation controls and where you’re doing well, so you can focus your attention on what matters instead of on follow-up.

ZenRisk enables you to streamline operational risk management by automating the tedious and time-consuming tasks that typically monopolize your day.

With ZenRisk, you can eliminate much of the burden of operational risk management, and concentrate on mission-critical items.

Ready to learn more? Schedule a demo today.

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