  This paper develops a dynamic internal fraud model for operational losses in
retail banking. It considers public operational losses arising from internal
fraud in retail banking within a group of international banks. Additionally,
the model takes into account internal factors such as the ethical quality of
workers and the risk controls set by bank managers. The model is validated by
measuring the impact of macroeconomic indicators such as GDP growth and the
corruption perception upon the severity and frequency of losses implied by the
model. In general,results show that internal fraud losses are pro-cyclical, and
that country specific corruption perceptions positively affects internal fraud
losses. Namely, when a country is perceived to be more corrupt, retail banking
in that country will feature more severe internal fraud losses.
