What is Operational risk?

Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, systems, human errors, fraud, or external events that impact the operations of a business. Unlike financial or market risks, which are linked to economic factors, operational risk arises from the day-to-day functioning of the business and can affect the company’s ability to achieve its objectives and deliver its services or products. This type of risk can have significant financial and reputational consequences if not properly managed.

Key Features of Operational Risk

• Internal Processes and Systems: Operational risk can arise from flaws or breakdowns in a company’s internal processes or systems, such as inefficient workflows, outdated technology, or human errors in decision-making. For example, a failure in data processing or a software malfunction can disrupt operations.
• Human Errors and Fraud: Employee mistakes, negligence, or misconduct can lead to operational risks. This includes errors in financial reporting, mismanagement of resources, or incidents of fraud and theft. Inadequate training or lack of proper oversight can increase the likelihood of such risks.
• External Events: External events, such as natural disasters, regulatory changes, supply chain disruptions, or cybersecurity breaches, can also contribute to operational risk. For instance, a fire that destroys equipment or a cyberattack that compromises data security could severely impact business operations.
• Compliance and Legal Risks: Operational risk also includes the risk of non-compliance with laws, regulations, or industry standards. Failure to meet regulatory requirements or to protect intellectual property can lead to legal action, fines, or reputational damage.

Operational Risk in Switzerland

In Switzerland, operational risk is a key concern for businesses across various industries, especially in sectors like banking, insurance, and healthcare, where regulatory compliance and security are paramount. The Swiss Financial Market Supervisory Authority (FINMA) provides regulatory guidelines that require financial institutions to manage operational risks and implement effective risk management frameworks.

Swiss companies, particularly large multinational organizations, are subject to strict internal control systems and risk management practices to identify, assess, and mitigate operational risks. Risk management strategies often involve the establishment of clear processes for internal control, staff training, regular audits, and contingency planning.

Swiss law and regulations also emphasize the importance of data protection and cybersecurity, making it critical for companies to safeguard sensitive information and adhere to the highest standards of operational integrity.

Operational risk management in Switzerland is supported by strong financial and legal infrastructure, which helps businesses reduce the impact of operational disruptions and ensure continuity of service. By proactively identifying and mitigating operational risks, companies can minimize potential losses and maintain their reputation and operational efficiency.