A Research On The Internal Fraud Risk Of China's Commercial Banks

Credit risk, market risk, operational risk are the three major risks faced by banking industry. However, before the Barings collapse, the attention of the banking industry, Basel Committee and scholars all focused on the credit risk and market risk. Until 1995, Barings Bank went bankruptcy due to Nick Leeson's illegal operations, operational risk got the banking industry and Basel Committee's attention. Then operational risk began to be included in the scope of commercial bank risk management, and ultimately was written into the framework of Basel II.Basel II puts forward new requirements for the measurement and management of operational risk in international banking system, define operational risk as "Risks of loss resulting from inadequate or failed internal processes, people and systems or from external events", including legal risk but not strategic and reputational risk. After the publicize of BaselⅡ, China Banking Regulatory Commission has announced a series of rules and regulations to meet the requirements of sound risk management, such as in June 2007, China Banking Regulatory Commission issued "Guidelines for Commercial Bank Operational Risk Management". Those rules and regulations provide a theoretical basis for operational risk management.Scholars in domestic and foreign have done many theory and empirical researches. But whether the models are suitable for our country, whether Basel II is fully applicable in our commercial bank,there is no conclusive, it needs further study. Under this background, study the current situation of China's operational risk, analysis the current situation in China from the view of practical cases is of significant importance.In China's commercial banking system, internal fraud risk accounts for the largest proportion, and it is very typical, so in this paper, I choose the internal fraud risk as my study. This topic comes from Societe Generale bank's internal fraud event. After the comparative analysis between this case and the Barings Bank case, I found there are so many comparability, new cases, old problems. Once again, lacking of internal control, doubting about the empirical models are proposed within the risk management. So we should proceed from reality, from the foundation of internal fraud risk to manage it. This is exactly why I choose to continue my study from the analysis of loss cases happened in our county, and also, I combine case analysis with internal control theory to discuss how to manage the internal fraud risk.In this paper, I collected loss cases happened in the recent five years occurred in China's commercial banks, through the screening of information, finally I selected 81 useful cases for my study. First of all, trough summarize the basic information, I sum up the status, characteristics, causes of internal fraud risk in China's commercial banks, and based on those information, I summarize the problems existed in the risk management. Secondly, I discussed how to use internal ratings method to measure internal fraud risk. Then I promoted to manage the internal fraud risk from the perspective of internal control. At last, I gave out the detailed analysis of the Societe Generale Bank case, summing the management lessons for China's commercial bank.There are six chapters in this paper:ChapterⅠis introduction. Briefed on the background, purpose and significance, ect; ChapterⅡis relevant theoretical analysis about internal fraud risk; ChapterⅢis the analysis of status, characteristics, causing and existing problems about internal fraud risk in our country; ChapterⅣis about the measurement of internal fraud risk based on the internal rating system; Chapter V is about the management of internal fraud risk based on the internal control theory; Chapter VI is the specific analysis of the Societe Generale Bank case.Based on the seriously study above, we have found the following important conclusions and recommendations:1. Based on the internal control theory, there are six mainly problems existed in China's commercial bank system:the recognizing bias about risk management; defects existed in the internal control system; risk identification and assessment tools shallow;lacking of information exchange and feedback mechanisms; supervision is not enough; incentive is seriously flawed. According to these problems, there are some corresponding resolutions.2. Choose to study internal fraud risk not the operational risk is helpful for a reasonable orientation, avoiding too vague.3. Discussing internal fraud risk using qualitative analysis is practical in our country.