A multicriteria decision framework for measuring banks' soundness around the world

A multicriteria decision framework for measuring banks' soundness around the world

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Article ID: iaor20084534
Country: United Kingdom
Volume: 14
Issue: 1/3
Start Page Number: 103
End Page Number: 111
Publication Date: Jan 2006
Journal: Journal of Multi-Criteria Decision Analysis
Authors: , ,
Keywords: decision theory: multiple criteria
Abstract:

In this paper, we use a sample of 894 banks from 79 countries to develop a multicriteria decision aid model, for the classification of banks into three groups on the basis of their soundness. The model is developed with the UTilités Additives DIScriminantes (UTADIS) method, through a 10-fold cross-validation procedure using six financial and four non-financial variables. The ratings of Fitch form the basis for assigning banks into the three groups. The results indicate that the asset quality (as measured by loan loss provisions), capitalization, and the market where banks operate are the most important criteria (in terms of weights) in classifying the banks. Profitability and efficiency in expenses management are also important attributes, whereas size and listing in a stock exchange are the least important ones. UTADIS achieves higher classification accuracies than discriminant analysis and ordinary logistic regression which are used for benchmarking purposes.

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