Assessing the Internal Fraud Risk of Chinese Commercial Banks

Abstract

As one of the seven loss types of operational risk presented by the new Basel Accord, internal fraud is a significant risk source for the banking industry in China, it maybe the most important source among the sources of people, process, systems and external events of operational risk in China. This paper evaluates the internal fraud risk and the corresponding economic capital for medium scale Chinese banks with peak over threshold method to overcome the loss data shortage problem in some degree. The paper finds that the internal fraud capital may exceed 80% of the total operational risk capital even we use the basic indicator method to evaluate the total operational risk, which proved by some researchers be a method may overestimate the operational risk capital, and there would be a internal fraud loss more than 609 million Yuan every 8 months for a medium scale bank. The results indicate that the internal fraud risk has become one of the foremost operational risks for Chinese commercial banks.