BEICFs Modelling and Integration into the Capital Model

Rafael Cavestany

After describing the modelling of ILD, ED and SA in Chapters 4 and 5, 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 presents methods for the use of BEICFs in capital calculations. BEICFs are metrics (internal audit, RCSA, 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 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 calculations:

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  “Ex post capital adjustment driven by BEICFs”: the use of BEICFs for the determination of capital add-ons to make capital estimates more forward looking and/or penalise/reward business units based on their operational risk management