Historically, the banking sector has always been plagued by vulnerabilities and risks. The global financial crisis of 2007 and 2008 is an indicator of this fact. Robust risk and compliance management programs and use of technology have helped banks to make good progress on the risk management front. While these control systems and risk management protocols are constantly evolving, operational risk always remains a concern.
What Are the Top Operational Risks for Banks?

From the ever-present threat of fraud, both internal and external, to the sophisticated cybersecurity risk, banks today, have numerous weak spots. This may be primarily due to the fact that financial entities are trying to stay on par with the ever-evolving digital landscape and this dynamic environment is relatively unexplored. Operational risk has been an independent risk category for just 2 decades now and the shifting sands of the virtual space does banks no favors.
Inherently, managing operational risks as a bank is a herculean undertaking. Some of the common roadblocks include:
- Complexity, due to the involvement of several, diverse risk types
- Uncertainty between the role of operational-risk functions and oversight groups
- Uncertainty between the role of operational-risk functions and oversight groups
All these are present in today’s environment and the integration of digitization only opens doors to more vulnerabilities. Even though improved access to data and better analytics has and can be leveraged to improve operational risk management, some of these risks might just be here to stay.
The operational risks can emerge from mistakes of employees, failed internal controls, wrongly implemented controls, frauds, failed processes, disrupted third party operations or internal operations. For greater insight, here are the top operational risks in banking.
Third-party risk
It is quite common for today’s financial institutions to rely on third-party providers for a range of services. These may be employed to better the experience customers enjoy or add to the arsenal of features on offer, but with these advancements comes serious risks. Banking institutes have to vet these providers to ensure that their vulnerabilities don’t spill over to the main enterprise.
Going one step further, total responsibility is usually that of the contractor as they are the ones that face the reputational damage that follows a breach. This means, controlling third-party risks also involves evaluating the risks associated with any vendors used by the third-party provider in question. This highlights the sheer complexity of managing operational risks in the banking sector.
Internal and external fraud
These are a form of operational risk that stems from a number of vulnerabilities and poses a threat to the entities’ financial condition, both current and projected. Fraud can arise from either:
- Failed or inadequate internal systems or controls
- Human misconduct or error
- External events
Fraud is mostly intentional, and is carried over long periods of time, sometimes even years. The losses incurred due to these crimes is difficult to determine mainly because it doesn’t stop at knowing the direct financial losses. Other factors such as the loss of productivity, investigation expenses, both cost and time, legal and compliance costs, and loss of reputation also get added into the mix for an even greater capital loss. But, thanks to the new technology, primarily machine learning, there is a way to mitigate such losses.
As per data published by McKinsey & Company, a North American bank was able to identify such risks and get ahead of them before it was too late. This bank used advanced-analytics models to monitor behavior and know its risk exposure from its retail salesforce. This method unearthed unwanted anomalies from the 20,000 employees it gathered data from.
Digital transformation risk
With the pressure to go digital and keep up with the convenience and simplicity of service offered in the market, banking entities have their work cut out for them. This also applies to FinTech firms looking to give their customers the easiest and quickest experience. But this transformation to the digital sphere isn’t one without security concerns. This type of undertaking has several risks involved, including:
- Compliance risks
- Product risks
- Strategic risks
- IT risks
- Business risks
- Cultural risks
Cyber risk
With digitization now taking its place as a mainstay in most sectors, it is no surprise that it comes with its own set of risks. Even despite the proactive risk management protocols or cybersecurity controls in place, phishing, ransomware and other such risks are still a threat. In fact, these risks have become more effective and occur more frequently. Data suggests that such attacks have tripled in the last 10 years and will continue to do so for as long as there is a reliance on digital finance services.
To make matters worse for financial institutions, antagonistic governments are known to orchestrate hostile activity around the financial services sector. Crippling these systems causes widespread disruptions and the losses are huge. A report from Accenture and the Ponemon Institute titled, ‘Unlocking the Value of Improved Cybersecurity Protection’suggests that cyber risks, and the subsequent attacks that follow, are the highest in the banking industry and can amount to a whopping $18.3 million yearly, per company.
Data privacy and management risk
Data privacy and its security is of key importance to the banking sector and it is also a facet that has been closely followed in the news. Part of the reasons for this being the 2020 California Consumer Privacy Act (CCPA) and the EU’s General Data Protection Regulation (GDPR). However, when it comes to data privacy, the problem lies with data management. Considering that most banking entities have their data siloed, there is a gap created between this data and governance processes. This is a base-level vulnerability as AI-enabled systems face crucial data shortages that undermine its function.

While banking entities have every incentive to minimize operational risks, this is difficult to sustain. If neglected, banks risk more than just the loss of capital. In some cases, customers lose their trust in the entity and this hurts banks by restricting business or future deposits.
Incorporating operational risk management into the overall enterprise risk management framework is a systematic process and is one that must have its own tools and organization. This is where an all-in-one solution like that from VComply offers value. The platform provides a GRC suite that offers effective risk management frameworks and controls, while revolutionizing management of regulatory compliance. This tool enables seamless digital collaboration and gives you real-time risk management solutions.