What does operational risk involve?

Operational risk specifically pertains to the potential for loss resulting from inadequate or failed internal processes, people, systems, or external events. This category of risk emphasizes the importance of a bank's internal operations and controls. It encompasses factors such as system failures, human errors, and fraud—highlighting how critical a robust operational infrastructure is to a financial institution’s health and stability.

While other options mention valid concerns within the banking sector, they do not accurately define operational risk. Risks associated with market fluctuations pertain more to market risk, liquidity shortages are connected to liquidity risk, and fraud and mismanagement, although relevant, are just subsets of the broader scope of operational risk. Therefore, the focus on internal processes and potential failures makes the correct understanding of operational risk crucial for banking professionals.