What Are the Top Operational Risks for Banks?
In one of its papers, the Basel Committee on Banking Supervision (BCBS) defines operational risks for banks as “the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events.”
Since the global financial crisis in 2008, financial institutions have established advanced systems to control financial risk. Alas, they haven’t been able to deal with operational risk as effectively. One reason is that operational risk is more complex, involves many risk types, and is not always easy to measure. Another is that active risk management requires advanced visibility into diverse processes and activities across the organization.
Banks and other financial institutions must evaluate and manage operational risk through various tools and mitigation strategies.
Operational Risks vs. Strategic Risks
In banking (as in other industries) operational risk is often confused with strategic risk. The two concepts actually are distinct and should be managed as such.
Strategic risks arise when an initial business strategy fails to deliver the expected objectives, affecting the financial organization’s progress and development. Such risks can be created due to a technological change, the entry of a new competitor, or changes in consumer demand.
The different types of operational risk, on the other hand, arise from failed internal procedures, employee errors, data breaches, fraud, or external events that disrupt operations.
Top Operational Risks in Banking and Financial Services
New business models, complex value chains, regulatory challenges, and increasing digitization have created unknown operational risks for banks in recent years. These include:
Cybersecurity Risk
Even as financial institutions ramp up their cybersecurity efforts, cyber risks, including ransomware and phishing, have become more frequent and influential, affecting their operational continuity.
This is especially true in the post-pandemic world, where threat actors leverage security weaknesses in firms’ IT infrastructure to perpetrate serious (and profitable) cyberattacks.
Third-Party Risk
Financial institutions are increasingly relying on third-party providers, which means they must identify, evaluate, and control third-party risks throughout the lifecycle of their relationships with those companies.
With that increasing digitization and hyper-connectivity, however, banks must also worry about the fourth parties that do business with their third parties; those risks must also be identified, evaluated, and managed.
Internal Fraud and External Fraud
According to one survey, almost 40 percent of mid-sized and large digital financial services organizations experienced an increase in fraud in 2020. Operational risk losses from internal scams can stem from asset misappropriation, forgery, tax non-compliance, bribes, or theft.
Fraud committed by external parties includes check fraud, theft, hacking, system breaches, money laundering, and customer information theft. The risk of both internal and external frauds arises from diverse factors, including the massive growth in transaction volumes, the availability of sophisticated fraud tools, and the security gaps created by increasing digitization and automation.
Business Disruptions and Systems Failures
Hardware or software system failures, power failures, and disruption in telecommunications can interrupt any financial organization’s business operations and lead to financial loss.
In addition to the operational risks identified above, other risk or loss data events could harm financial companies, increase reputational risk, or lead to legal problems. These include:
- Missed deadlines;
- Accounting or data entry errors (human error);
- Vendor disagreements;
- Inaccurate client records;
- Loss of client assets through negligence;
- Operational losses.
Losses from operational risks can devastate a financial firm. They can also harm its business continuity, reputation, and compliance position.
As the financial services landscape becomes increasingly complex, banks and other financial companies must control operational risk by adjusting their risk management strategies, systems, and procedures.
Identification and Assessment of Operational Risk
Before managing operational risks, banks must first know where those risks exist and how serious they are. That’s why operational risk identification and assessment are the crucial components of any bank’s risk management program.
The process typically starts with a risk and control self-assessment (RCSA). Business units map out their processes, flag potential failure points, and estimate the severity and likelihood of those risks to 1) spot obvious issues and 2) highlight inherent risks that exist even when controls are working as intended.
Once risks are identified, banks rely on several methodologies to evaluate exposure. Key risk indicators (KRIs) play a central role here, providing early warning signals (e.g., increased error rates or longer processing times) that point to potential problems. Banks may also analyze internal loss events to understand past failures and prevent repeat occurrences.
For more complex risk assessments, tools like scenario analysis and the loss distribution approach (LDA) help model potential future losses. These methods are particularly useful for low-frequency, high-impact events. Institutions following the Advanced Measurement Approach (AMA) (as defined by the Basel Committee, though now being phased out under Basel III reforms) use these techniques to quantify their operational risk capital estimates.
In larger banks, teams from different departments work together to review risks through audits and workshops. This helps make sure risk isn’t handled in isolation and stays part of everyday decision-making as systems and rules change.
Ultimately, what matters most is the distinction between inherent risk and residual risk—that is, the amount of risk left after controls are applied. Banks that assess this gap honestly are better positioned to invest in the right fixes before those risks become real losses.
Management and Control of Operational Risk
Once operational risks are understood, the next step is control—and that requires a strategic but practical approach. There’s no one-size-fits-all solution; banks must blend policies, controls, and culture into a system that adapts as new risks emerge.
At the heart of this is a strong risk management framework that helps guide day-to-day decisions. It also builds a culture where teams understand how their work affects risk and feel confident taking action to manage it.
Internal controls are the first defense: dual approvals, restricted system access, detailed logs, and real-time alerts for unusual activity. But no system is perfect, so banks also rely on continuous monitoring to spot issues early.
To reduce potential risk exposure, banks typically use a combination of the following strategies.
- Risk mitigation: Redesigning workflows, training employees, or tightening security for risky processes.
- Risk transfer: Using insurance to cover certain losses if things go wrong.
- Risk avoidance: Choosing not to take on high-risk activities or third-party partners in the first place.
That’s why vendor management is a critical piece of the puzzle. Banks must assess vendor risk before onboarding and continue monitoring their performance and resilience throughout the relationship.
Cybersecurity and fraud prevention deserve dedicated focus as well. With growing digital exposure, banks must invest in advanced threat detection, identity verification, and incident response playbooks to stay ahead of attackers. Business continuity and compliance round out the operational risk management strategy. Continuity plans keep services running during disruptions, while compliance ensures discipline and alignment with evolving regulations.