What kind of risk can arise if a financial institution does not keep up with regulatory changes?

The correct choice of operational risk refers to the potential losses a financial institution may experience due to failures in its processes, people, or systems, particularly as a result of not adapting to regulatory changes. When institutions do not stay current with evolving regulations, they may face compliance failures, leading to monetary penalties, legal issues, and damage to their reputation. This jeopardizes their operational integrity, leading to inefficiencies or breakdowns in service delivery.

In contrast, credit risk primarily involves the possibility of loss from a borrower's failure to repay a loan or meet contractual obligations, which is unrelated to regulatory compliance. Fraud risk pertains to the potential for losses due to deceptive practices by either internal or external parties, while systemic risk is associated with the broader financial system's potential for collapse. These other categories do not specifically address the implications of failing to comply with regulatory standards. Therefore, operational risk accurately reflects the risk that arises directly from inadequate management of regulatory changes.