What is operational risk?

Operational risk refers to the potential for loss that can arise from inadequate or failed internal processes, systems, or personnel, or from external events that can impact an organization negatively. This encompasses a wide array of risks, including fraud, legal risks, physical risks from unforeseen events such as natural disasters, and technological failures.

Choosing the option that highlights the risk of loss due to these inadequacies correctly identifies the essence of operational risk. This risk category is fundamental to the overall risk management framework within financial institutions, as it pertains directly to the effectiveness and reliability of how an organization operates on a day-to-day basis.

The other options describe different forms of risks that are not classified as operational risk. For instance, market fluctuations and interest rate changes pertain to market risk, which is associated with the financial markets' external environment rather than internal failures. Global economic changes instead could fall under systemic risk or economic risk but do not address the internal processes that operational risk focuses on. Thus, identifying operational risk specifically as a risk arising from the failures within a firm underscores its critical role in risk management.