BEICFs modelling and integration into the capital model

Rafael Cavestany

After describing the modelling of internal loss data (ILD), external loss data (ED) and scenario analysis (SA) in Chapters 4, 6 and 7, we now look at the modelling of business environmental and internal control factors (BEICFs), the fourth and last of the data elements of an operational risk capital model.

This chapter will present methods for the use of BEICFs in capital calculations. BEICFs are metrics (internal audit, risk and control self-assessment (RCSA), key risk indicators (KRIs) – see Chapter 3) that point to weaknesses permitting operational failures, and hence they can provide a forward-looking character to the capital model. The benefits of the use of BEICFs are recognised by the Basel Committee on Banking Supervision “Operational Risk – Supervisory Guidelines for Advanced Measurement Approaches” (BCSG-AMA) when it says: “BEICFs are operational risk management indicators that provide forward-looking assessments of business risk factors as well as a bank’s internal control environment”.

We introduced BEICFs and their use as an input into SA in Chapter 3, and in the following sections we present various methods for using BEICFs directly into the capital

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