Definition of Operational Risk

The one of operational risk It is a concept that is widely used in the commercial field and of the finance.
It is composed as we observe by two well-known terms in our language as they are, risk and operational.
By risk it refers to the proximity, whether of damage or dangerIn other words, a dangerous or harmful situation is highly likely to occur.
And for its part, the word operational is used to refer to those commercial operations or everything related to them.

So, operational risk is a concept that allows us to name that scenario in which the succession of financial losses in a company is possible, for example, as a consequence of some failure or insufficiency in the matter of processes, individuals, internal systems, technology or the events of some external event that was not foreseen and that ends up surprisingly damaging the economic performance of a business.

It is worth noting that to assess this risk, two variables are taken into consideration, such is the case of:

probability that there is a risky event happening for the company in question and that it can be elucidated through the knowledge of the number of times in which the presence of events that are causing risk. And on the other hand, the seriousness of the risk events in the heritage of the company.

Meanwhile, when measuring operational risk, three different methods may be chosen: basic indicator method (In this, the capital requirement will be calculated based on a proportion fixed by the average of the income gross annual and positive, obtained in the last three years), standard method (This will calculate the gross income in each business line and each one will be multiplied by a factor that will estimate the exposition that holds the line in question. This makes it possible to find out the capital provision for each of the lines and finally the total capital requirement will be the sum of the requirements present in each of the lines) and advanced measurement method (This offers a measurement of capital that is more adjusted to the situation of each company and does so through the estimation of the functions of distribution probability).

Issues in Operational Risk