Which of the following best defines operational risk?

Operational risk is best defined as the risk arising from inadequate or failed internal processes, people, systems, or from external events. This definition encompasses a broad range of risks that can lead to losses in an organization, such as fraud, technical failures, and compliance breaches, as well as other internal inadequacies.

This option captures the essence of operational risk by emphasizing that it can originate from within an organization’s own structure—such as failures in its processes or systems—as well as the actions of its personnel.

The other options do not fully encapsulate the definition of operational risk. For instance, while one option focuses narrowly on financial losses, operational risk is broader and includes both financial and non-financial loss scenarios. Another option relates to market volatility, which is more aligned with market risk, not operational. Lastly, the choice regarding external factors is too vague and could apply to a variety of risk types, but does not specifically address the core of operational risk, which relies heavily on internal processes and systems. Therefore, option B accurately and comprehensively defines operational risk in the context of risk management.