Definition
Operational risk encompasses technology failures, fraud, human error, legal liability, compliance failures, and external disruptions. Basel II/III requires banks to hold capital against operational risk. Unlike market or credit risk, operational risk is difficult to quantify because losses are often rare but catastrophic (rogue trader events, IT system failures).
lightbulb Example
Examples: the 2012 Knight Capital trading algorithm bug lost $440M in 45 minutes. The 2008 Société Générale rogue trader caused €4.9B in losses. Both were operational risk failures in processes and controls.
verified_user Key Points
- Covers people, processes, systems, and external events
- Required capital charge under Basel II/III
- Difficult to quantify—rare but potentially catastrophic
- Rogue trader events are extreme operational risk