Legal risk

This article needs to be updated. Please help update this article to reflect recent events or newly available information. (October 2021)

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Basel II classified legal risk as a subset of operational risk in 2003. This conception is based on a business perspective, recognizing that there are threats entailed in the business operating environment. The idea is that businesses do not operate in a vacuum and in the exploitation of opportunities and their engagement with other businesses, their activities tend to become subjects of legal liabilities and obligations.^[1]

One of the primary reasons why legal risk is associated with operational risk involves fraud since it is recognized as the most significant category of operational loss events and considered to be a legal issue as well.^[2] This, however, does not mean that legal risk is only confined to this conceptualization. For instance, there are specific sets of legal risks that are defined by European Union (EU) Law. In 2005, the European Central Bank declared that it will develop its own legal risk definition to help "facilitate proper risk assessment and risk management, as well as ensure a consistent approach between EU credit institutions."^[3]

Further developing legitimate risk the board for any organization does not require many steps. This process won't prevent each lawsuit or administrative punishment, however, it can reduce lawful risks and enhance the organization's responses.^[4]

Hazard is intrinsic in any business undertaking, and great danger management is a fundamental part of maintaining a fruitful business. An organization's management has shifting degrees of control concerning hazards. A few dangers can be straightforwardly overseen; different dangers are largely outside the ability to control organization management. Everything an organization can manage is to attempt to expect potential dangers, survey the possible effect on the organization's business, and be ready with an arrangement to respond to unfavorable occasions.^[5]