What type of risks does operational risk mainly relate to?

Operational risk primarily pertains to a firm's internal operational processes. It encompasses the potential for loss resulting from inadequate or failed internal processes, systems, and people, or from external events affecting these processes. This type of risk can arise from various aspects of daily operations, including but not limited to human errors, system failures, process flaws, and fraud. By recognizing operational risk as linked to internal practices, organizations can implement strategies to strengthen these areas, which may include staff training, improving technology, and refining operational procedures to mitigate such risks effectively.

While other types of risks like external economic factors, investment risks, and regulatory compliance issues are also important, they do not fall under the operational risk category, which is distinctly focused on the internal workings of the firm. Understanding this connection is crucial for risk management professionals, as it allows them to allocate resources efficiently and prioritize mitigative actions within the organization.