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Operational Risk is "The Risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. These are far impacting risks within any enterprise.
Haselfrė uses a more practical definition that helps risk identification, measurement, management and mitigation, which is :
"The risk of loss from business disruption, control failures, errors, misdeeds, or external events"
- Identifying the risk: What can go wrong?
- Measuring the risk: Approximately
how critical is a particular risk?
- Preventing operational losses, e.g.,
standardized deal documentation.
- Mitigating the loss impact after it
has occurred by reducing the firm's
sensitivity to the event, e.g.,
disaster contingency planning.
- Predicting operational losses, e.g., projecting the
potential legal risks and market cannibalization
associated with a new product or service.
- Transferring the risk to external parties presumably
better able to handle the risk, e.g., insurance, hedging,
surety.
- Changing the form of the risk to another type of risk
and dealing with that risk, e.g., transforming market
risk into dredit risk by using OTC products, transforming
credit risk into operational risk by the use of margin or
collateral. Allocating capital to cover operational risks.
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