Operational risk covers a wide range of issues faced in a modern, complex financial institution. A very common definition of operational risk is that it is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risks can manifest itself in many ways, including clients, products and practices. For example, selling an inappropriate banking product to a client who doesn't fully understand the product in order to boost revenue.
Execution, and delivery. This could include making errors when implementing a new technology platform. System failure, for example, a payment system going down, so customers cannot use their credit cards. Employment practices, such as constructing remuneration policies in such a way that discourages employees to make decisions based on the long-term good of the bank and its customers. Fraud, for example, a customer submitting fake invoices in order to get a loan from a bank. Physical asset damage and contingency failure, which could include an earthquake shutting down an entire trading floor. Model risk, which relates to a model being used to make decisions that were not part of its original design process. And operational risk covers a very wide range of risk factors, ranging from small frequent everyday losses to much larger potentially catastrophic losses, which occur much less frequently. This make it much more complicated if not impossible to quantify operational risk in the same way that credit risk and market risk can be quantified.
One example of an operational risk is Wells Fargo. The Wells Fargo fake-accounts scandal was a major financial scandal and it had broader implications for the financial industry, such as transparency, accountability, and business ethics. The revelation the bank had been creating fake-accounts in the name of customers without their knowledge or consent was a major blow to its reputation and its financial stability. The consequence of the scandal was far reaching and they continue to be felt by the company and its stakeholders today.
