Main Differences Between ‘Operational Risk’ and ‘Operations Risk’

April 2, 2019
Investment Banking Course

The prospect of losing something due to operations or logistics in any business is daunting. However, for those conducting business, the main difference between operational and operations risks need to be understood. Here is how.

One of the biggest challenges that any company faces is its ability to understand and embrace risk. The risk could be associated with various aspects of the business including operation-based or operational risk or risk of changing.  Adapting and evolving to change can be the greatest asset of a company when it comes to dealing with risks. This is a difficult function for many and it is mainly since one does not understand fully what risks are involved when it comes to running a business.

To start with the basics let us try and understand the main risks in the field of investment banking. If one is pursuing a career in investment banking, they must be able to firstly function in a high risk, high return environment. So innately the job comes with its own set of challenges. Operational risk is defined as the risk of change in value which can cause actual losses which can be due to several factors such as loss of processes, people and systems or external events such as a legal risk. It is linked to good management and quality assurance as well, so it is an important aspect of any business process. Individuals who have investment banking training will be able to assess the operational risk and make appropriate forecasts.

Similarly, operations risk can be the ones associated with decision making and strategy. A plan may be formulated to conduct the business in a certain way and there may be naturally occurring operations risk which adds losses to the business. This can again be planned in such a way that the business minimizes or mitigates the risk associated with conducting the business.

Investment bankers who have completed an investment banking course are highly attuned to understanding the operational risks that come with the business. Hence, they are equipped to deal with the same in a manner that benefits the company in the long-run.

Here are the top ways banks deal with operational risk.

Capital buffer

Operational risks can sometimes have disastrous effects on the company.  It can be due to errors made by employees or processes while dealing with the clients or a function. In order to manage this kind of a risk, companies keep a contingency plan or a capital buffer to ensure that the impact can be managed. This is like a Plan B for the company in case things go wrong. Investment bankers recommend putting away a certain percentage of the capital for such scenarios while assessing the business proposition.

Becoming more Digital

As the world moves towards digital transformation, many organizations are considering artificial intelligence and machine learning to reduce operational risk. This is proving to be effective to a large degree as machines can perform the tasks required in a seamless fashion with zero errors.

Conclusion

While risk is an unavoidable reality of conducting business, when one can distinguish between the various types of risk, they are in a better position to take a decision which will impact the growth and success of the company.

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