The challenge for banks is to put in place a risk-control system that minimizes the volatility in profit and engenders risk-consciousness across the rank and file of the organization.

Over the last two decades, banking has changed considerably. The mind boggling advances in technology and deregulation of financial markets across the countries created new opportunities, tempting banks to enter every business that had been thrown open. Every bank thus rushed to become a sort of universal bank unmindful of the costs—which could be substantial—that a new business could impose on the existing business. This has brought operational risk to the forefront alerting everyone concerned with the stability of banks and the financial architecture of a country to manage it effectively. Accordingly, the Basel Committee mandates an explicit allocation of certain minimum capital by banks to protect themselves against `operational risk', supervisory scrutiny of operational risk policies, procedures and processes, and effective disclosures thereof for ensuring market displine.

Operational risk is as old as banking. It even precedes market and credit risks, and yet, there is no universally accepted definition of it. Operational risk is often defined by what it is not: any risk that is not related to credit, market, and liquidity risk is identified as operational risk. Different banks perceive it in different ways: some perceive it as any risk that is not categorized as market or credit risk; a risk of loss arising from various types of human or technical error; risk associated with settlement or payment risk and business interruption and legal risk; risk of frauds by employees and outsiders; unauthorized transaction by employees and errors relating to computer and telecommunication systems; and the potential exposure to missed opportunity or to unexpected financial, reputational, or other damages resulting from the way in which an organization operates and pursues its business objectives. This ambiguity that shrouded operational risk might have prompted the Basel Committee on Banking Supervision to specifically define operational risk as "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events".

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