Operating Risk

Operating risk

The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk.

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Operating Risk

Risk from sources other than inadequate funding (credit risk) or a change in market factors (market risk). Basel II defines operating risk as the "risk of loss resulting from inadequate or failed internal processes, people and systems or from external events." Thus, operating risk may come from mundane sources such as incompetent personnel or miscommunication between a buyer and a seller, or it may stem from events beyond a firm's control, such as terrorism, damage to goods in transport, or even a sudden drop in demand. Because it is not (primarily) financial, it is the most difficult type of risk to quantify. Sometimes, operating risks are predictable; for example, a farmer can prepare for a drought that would harm his/her harvest and therefore profits. On the other hand, risk from an employee's fraud is often impossible to anticipate. Consultancies often offer operating risk management, identifying and attempting to eliminate it as much as possible. See also: Political risk, Reputational risk.