Which type of risk refers to losses due to inadequate processes?

Operational risk refers to the potential for loss resulting from inadequate or failed internal processes, people, systems, or external events. This type of risk encompasses a wide range of issues that can arise within an organization, such as transaction errors, system failures, fraud, and compliance breaches.

Inadequate processes can lead to significant financial losses and damage to an organization's reputation. For instance, if an organization lacks appropriate process controls, it may face operational failures that disrupt normal business activities, resulting in losses and potentially harming customer trust.

In contrast, market risk deals with losses due to fluctuations in market variables like interest rates and currency exchange rates. Liquidity risk pertains to the inability to meet short-term financial obligations without incurring excessive costs, and credit risk involves the possibility that a borrower will default on a loan or fail to meet contractual obligations. Thus, the unique focus of operational risk on the efficacy of processes makes it the correct answer in this context.