How is operational risk best defined?

Operational risk is best defined as the risk to current or anticipated earnings that arises from inadequate or failed internal processes, systems, or policies. This definition encompasses a broad range of potential issues that can impact the financial performance of an organization, such as human errors, system failures, fraud, and other unforeseen events that disrupt normal business operations.

Identifying operational risk as a threat to earnings emphasizes the financial implications of internal failures. It highlights the importance of efficient processes and robust internal controls in safeguarding an organization's revenue streams. Given that operational risk encompasses potential losses not just from compliance failures or fraud but also from everyday operational shortcomings, this comprehensive understanding helps organizations prioritize risk management efforts.

The other definitions, while related to aspects of operational risk, focus more narrowly on specific elements, such as reputation loss or the failure of internal controls, without capturing the broader impact on earnings. Thus, the choice highlighting risk to current or anticipated earnings provides the most complete and accurate definition of operational risk.