What are operational risks in banking?

Operational risks in banking primarily refer to the potential losses that arise from inadequate or failed internal processes, people, and systems, or from external events. This includes a wide range of issues such as system failures, human errors, fraud, and natural disasters, among others. The significance of operational risk lies in its ability to affect an organization's daily operations and overall stability, potentially leading to substantial financial losses or reputational damage.

When considering the other options, market fluctuations represent risks more closely aligned with market risk, which pertains to the potential for losses due to changes in market prices. Changes in regulations involve compliance risks rather than operational risks, focusing on the legal and regulatory framework within which a bank operates. Investment risks associated with external economic factors are typically classified under credit or market risks rather than operational risks. Thus, the correct choice accurately captures the essence of operational risks in the banking sector.