Supervisors face reputational risk from fraud, Basel Committee says

Surveys shows some forms of digital fraud are rising, but data gaps are “significant”, paper warns

The Bank for International Settlements, Basel
The Bank for International Settlements, Basel
Photo: Ulrich Roth

Banks and their supervisors could both face reputational damage from digital fraud if lenders suffer major losses, the Basel Committee on Banking Supervision warns.

“High-profile” fraud cases could leave both banks and supervisors exposed to negative press coverage and “public discontent”, the committee says in a discussion paper, published today (November 15). “This could translate to a broader, system-wide loss of trust in the integrity and resilience of banks that could lead to, for example, mass bank deposit withdrawals.”

The Basel Committee has not yet decided whether further global action is needed on fraud, but published the paper to seek feedback. The comment period is open until February 16.

Quantifying the scale of the problem is a challenge, the committee notes, due to “significant data gaps”. Major jurisdictions tend to collect data on unauthorised payments, but less information is available on other forms of manipulation and identity fraud.

The paper breaks fraud down into four categories. It can involve unauthorised payments or customers being manipulated into making payments – categories one and two. Fraud may also involve manipulating customers into “investing” in fake products, or using stolen data to open accounts and apply for credit cards – categories three and four.

Category 1 fraud is the “most documented”, the Basel Committee says, but data on the other three categories “remains incomplete”.

The committee ran its own survey of 15 jurisdictions to gather data on fraud in online credit transfers and card payments. The report matches this against data on the number and value of online transactions, where this can be gathered from payment system statistics compiled by central banks.

For several jurisdictions, including the US and Canada, fraud is rising as a share of the value of online credit transfers. However, the fraudulent proportion of the total remains low, ranging from 0.01 to 0.4 basis points in 2021.

Online card fraud is a bigger problem, but the trend is downward. Fraud rates on cards were 13–34 basis points in 2018, but fell to 10–18 basis points in 2021.

Banking fraud as a share of total bank assets is small, the committee says, remaining below one basis point.

“The fraud phenomenon seems to have a relatively limited size in monetary terms; hence the risk of significant impacts on the stability of individual financial intermediaries, or on financial stability, seems at the moment to be limited,” the committee says.

However, the paper warns it is hard to judge the full impact of fraud given the limited data. “Overall, the available evidence suggests that there is a room for improving data on digital fraud,” the committee says.

Better data would allow authorities to improve their understanding of fraud and enable banks to enhance risk management and transparency. This would ultimately lead to better market discipline and consumer protection.

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