Final answer:
Operational Risk describes the risk to a line of business due to changes in the business environment, including internal and external events. For financial institutions, this includes the mismatch of asset and liability maturities, which can lead to solvency issues.
Step-by-step explanation:
The risk associated with the vulnerability of a line of business to changes in the business environment is described as Operational Risk. This type of risk refers to the potential for loss resulting from inadequate or failed internal processes, people, systems, or from external events. It encompasses a variety of risks such as process risks, people risks, systems risks, and legal and compliance risks. For instance, economic risks that an individual has little control over, like natural disasters, wars, or massive unemployment can also impact operational risk. When considering investments in the financial market, it is necessary to consider multiple factors including associated risks, the expected rate of return, liquidity, and the vulnerability to changing business environments. Banks, for example, face operational risks when there's a mismatch in the maturity of their assets and liabilities. A bank that finds itself paying higher interest rates to depositors than it is receiving from past loans may struggle to remain solvent.