ABSTRACT

The theoretical relationship between the macroeconomy and operational risk fraud losses has not received a lot of attention from researchers, but an understanding of this link would allow banks to tailor resources appropriately when managing risks and using stress tests. Despite ample anecdotal evidence suggesting that bank fraud tends to rise with economic activity and peak at the top of the business cycle, there is sparse research on the topic. The limited research is likely driven by difficulties in collecting data on fraud. Therefore, the following analysis uses a proxy for bank fraud stemming from US banks' regulatory reporting on fraud; then, the data is used to empirically test for correlations between fraud and the macroeconomy. The results support the idea that a positive relationship exists between bank fraud and the macroeconomy, indicating that this link should be accounted for in a bank's stress tests, and that policymakers may benefit from using fraud patterns as an economic indicator.