Operational Risk and Liquidity Risk – Be Aware with Both Risks

Operational risk is defined as the risk incurred by organizational internal activities which includes the risks from the people, systems, processes through which a company is operational. Other kinds of risks which an organization can face are those of external risks.

The internal risks include risks which arise from the people, systems, processes which are related to the company, however the external risks which a company can face includes those of fraud, legal risks, or the physical environment. In other words the operational risks are defined as the risk of the loss resulting from the failed internal processes, or the external sources.

Operational Risk

What is Operational Risk?

The word operational risk has been frequently used since 1990, and the topics related to risks have been the subject of the debates across the world, which came into play during the financial collapse in September 2008.  The deregulations in the financial markets along with the financial setups have also included more complexities in the financial activities around the institutions and resulted operational risks.  However the banks and the financial intuitions face larger scaled external risks, of the fraud, failures, terrorism and the risk of the employee compensation claims. All these risks are combining together called operational risks.

As a result of the both kind of the risks any of the institutions can fail to get its objective, and it would be collapse and will fail to operate any more. Many of the risks can be avoided with a precaution; however there are some unpredictable risks which cannot be avoided.

What is Liquidity Risk?

In order to understand  the term liquidity risk, we need to know that companies own assets and securities, which at times need to be sold, or can be purchased keeping in view the financial position o the market. Liquidity risk is a financial terms used in the financial world, which means that there is risk that a given assets own by a company cannot be traded quickly enough in the market in order to prevent a loss.

There are various reasons for the liquidity risks, liquidity risk arises from the situations in which a party which may be willing to sell off the assets which it hold, however it cannot be sold due to reason that the nobody is willing to trade for that asset. The term is frequently used in the currency market when two parties have to decide whether they need to hold or sell the currency or the asset.

liquidity risk

Liquidity risk is the financial risk. Due to the liquidity risk financial institutions can face complete lose if its credit rating falls, and it is a much unexpected event. Any institution can face sudden cash outflows or the any other unpredicted event due to which the other parties may resume trading with them. If any of the financial intuitions face liquidity risk, those firms which depend upon them also face loses.

The liquidity risk is more hazardous than the operational risk, and this spread is composed of the administrative, processing costs and the operational costs. In a nutshell we can say that the operational risk is a part of the liquidity risk.

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