Main Categories of Operational Risks in Banking. Methods Used by Financial Institutions to Identify, Prevent and Mitigate Risk Events

Abstract

Regular definitions of classical banking would bring into discussion the products and services offered to clients, with a deep focus on business activities, but only limited consideration given to other processes such as risk management. In such a view, some investors or managers would be interested in the efficiency of activities, eliminating many of the supporting steps or controls in place, in order to allocate most of the effort to the processing or client-oriented steps of the banking products. What has been noticed in theory and in practice is the fact that banking activity cannot function without the management of risks and the presence of a sound risk culture in financial institutions. This can be achieved, on the one hand, through the presence of an internal risk division to govern and coordinate risk management as well as implement prerequisites, some of them required by regulatory bodies, and, on the other hand, to promote a culture of risk, to turn each structure or staff member into the first line of risk detection, prevention, and mitigation. Among the main classes of risks are the operational ones, with a wide category of events in their portfolio, forcing banks to constantly build and develop their policies and processes in operational risk management. This paper will look at the main categories of operational risks and will mention some of the means used by the financial institutions to prevent and mitigate such risk events.