Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risk is inherent in all activities, products and services of financial institutions and can traverse multiple activities and business lines within the financial institutions. It includes a wide spectrum of heterogeneous risks such as fraud, physical damage, business disruption, transaction failures, legal and regulatory breaches, as well as employee health and safety hazards. Operational risk may result in direct financial losses as well as indirect financial losses (e.g., loss of business and market share) due to reputational damage.
Over recent years, significant changes have been observed in the operational risk profile of financial institutions due to a number of factors including increased business complexity, greater regional expansion, more extensive outsourcing arrangements, faster staff turnover, greater reliance on technology and strengthened regulations. These factors have led to heightened inherent operational risks in financial institutions, with associated implications for operational risk management practices.
This policy document sets out the Bank’s expectations for the management of operational risk by financial institutions. It aims to strengthen the governance, framework and processes for managing operational risk within financial institutions. Emphasis is also given to effective coordination in the management of operational risk with that of other risks (e.g., credit and market risks) to provide a holistic and integrated approach to a financial institution’s overall risk management strategy.
For larger and more complex institutions, the policy document also addresses the need for greater scrutiny at business and functional lines given the higher inherent operational risks faced and the potential dilution of operational risk issues at board and senior management level. Robust operational risk management and oversight arrangements at the level of business and functional lines are therefore expected for the larger and more complex institutions.
This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking
