Operational Risk Events

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Operational risks occur in the economy due to failed systems in the political and social sectors. More often than not, the loss occurs due to inevitable situations in the market. For instance, catastrophic events, pandemics, and economic depressions are the key contributors to operational risks. However, human factors are also to blame for active risks events. As can be expected, all skilled and unskilled labor is controlled by human resource events. Hence, losses and collapse of significant business is a result of stakeholders’ negligence. Moreover, with advancements in technology, companies should be up to date with innovations to prevent unaccountable revenue.

Cyber risk and data security are them a significant cause of crime in the globe today. Bangladesh experienced an operational risk event that was planned by ruthless informational technology criminals. The Bangladesh heist 2016 was an event that vast sums of money disappeared without a trace (Hofileña & Sy, 2017). The government’s failure to trace unidentified accounts; led to a massive deposit of funds to foreign accounts. The Bangladesh heist contributed to the revenue loss, but the cost also demonstrated how the internet is the vulnerable source of money laundering.

Operational risk events in Europe and the United States banks led to losses of millions of dollars. For instance, between 2008 and 2017, they lost over 700 billion dollars (Li et al., 2019). The leading cause of deprivation was the lack of accountability from wealthy customers. Moreover, workers in the bank could not account for abnormal returns from clients. Correspondingly, there was an unreliable protocol assessment of losses (Li et al., 2019). As a result of no coordination between banks and the clients, the financial institutions experienced financial constraints over a decade.

Low production of wheat in France experienced operational risk from weather patterns. Before the planting season, the weather was calm. However, heavy rainfall contributed to the flooding of farms, which hindered the germination of wheat (Van der Velde et al., 2020). Lack of production of the crop was a massive blow to the agricultural sector and the country. Conversely, operational risk events can be caused by natural phenomena when human activities are well planned. Above all, active risk events in the agricultural sector are unpredictable, depending on the year’s seasons.

Factors that increased operational risk South Africa include the following; the organizational skills, staff service to customers on bank-related activities, and the financial contributors (Kutumela, 2018). Organizational skills are essential in combating fraud within the bank. Moreover, the staff handling of customers prevents cases of sinister activities. On the contrary, the internal fraud in South Africa led to the loss of 915 million South African Rands. (Kutumela, 2018). Hence, the banks’ deprivation of funds was an opportunity for customers to commit the crime; due to lack of transparency.

The use of digital methods to acquire bank services escalated criminal activities and abnormal returns. To conclude, the workers were unable to monitor clients. Consequently, the banks witnessed massive losses from external fraud (Kutumela, 2018). Thus, the prevention of losses in financial institutions begins with staff accountability and transparency.

Operational risk events are mostly contributed by human activities related to the economic sector. Most operational risk events are related to finances. The digital platform is the primary source of committing fraud and abnormal returns in banks. Hence, the government should take advantage of technology to prevent cybercrime in financial institutions.

References

Hofileña, J. M. G., & Sy, J. L. (2017). Gone without a Trace: A Re-Examination of Bank Secrecy Laws and Anti-Money Laundering Laws in Light of the 2016 Bangladesh Bank Heist. Ateneo LJ, 62, 90.

Kutumela, J. T. (2018). Impact of operational risk events on the market value of South Africa banks (Doctoral dissertation).

Li, Y., Allan, N., & Evans, J. (2019). An analysis of the feasibility of an extreme operational risk pool for banks. Annals of Actuarial Science, 13(2), 295-307.

Van der Velde, M., Lecerf, R., d’Andrimont, R., & Ben-Ari, T. (2020). Assessing the France 2016 extreme wheat production loss—Evaluating our operational capacity to predict complex compound events. In Climate Extremes and Their Implications for Impact and Risk Assessment (pp. 139-158). Elsevier.