What is the definition of 'operational risk' in financial management?

The definition of 'operational risk' in financial management specifically refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems. This encompasses a wide range of potential failures, including issues related to staff performance, process inefficiencies, or technical system failures. Operational risks can arise from a variety of sources, such as mistakes made by employees, flaws in the company's procedures, or deficiencies in technological infrastructure.

By focusing on the internal workings of an organization, this definition captures the essence of operational risk as it relates directly to the day-to-day operations and organizational structure. Unlike other types of risks, such as market or credit risks, which stem from external factors, operational risk is primarily associated with how well an organization manages its internal processes and safeguards against potential failures. This emphasis on internal failures distinguishes operational risk from other categories of risk management in financial contexts.