Scenario analysis framework and BEICFs integration

Rafael Cavestany, Brenda Boultwood and Daniel Rodríguez

Having defined the collection process and sourcing of loss data in Chapter 2, in this chapter we present a scenario analysis (SA) framework that will permit the ability to collect scenarios in an adequate format and quality for its use in the capital model. The SA framework includes the incorporation of business environment and internal control factors (BEICFs), the fourth and last of the data elements of capital, as an input to SA.

SA allows the introduction of expert judgement within operational risk management and quantification. Expert judgement is used in many areas of science, business and policy making for forecasting future events when little relevant data is available. It is also used by credit and market risk management via stress testing and sensitivity analysis, which are based on expert defined scenarios. Expert judgement is used even when a model is created with wide historical data, since it provides circumstances not sufficiently represented in such historical data. In fact, it is those circumstances with little or no historical data that organisations generally worry most about, while those with abundant historical data are commonly better understood and

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