Define operational risk in the context of banking.

Operational risk in the context of banking refers specifically to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. This encompasses a wide range of potential issues, including human errors, systems failures, fraud, and other operational disruptions that can lead to financial losses or reputational damage.

This definition captures the essence of operational risk, as it distinctly highlights the reliance on organizational processes and the potential for internal failures that can adversely affect the bank’s operations and financial stability. Other options, while relating to risks faced by banks, pertain to different categories of risk. Economic downturns are tied to credit or market risk, competitive market dynamics relate more to strategic risk, and regulatory non-compliance falls under compliance risk. Therefore, the correct definition focuses on the specific nature of operational risk as a consequence of internal institutional factors.