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Modelling banking sector stability with multicriteria approaches

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Abstract

Banking crises can be damaging for the economy, and as the recent experience has shown, nowadays they can spread rapidly across the globe with contagious effects. Therefore, the assessment of the stability of a county’s banking sector is important for regulators, depositors, investors and the general public. In the present study, we propose the development of classification models that assign the banking sectors of various countries in three classes, labelled “low stability”, “medium stability”, and “high stability”. The models are developed using three multicriteria decision aid techniques, which are well-suited to ordinal classification problems. We use a sample of 114 banking sectors (i.e., countries), and a set of criteria that includes indicators of the macroeconomic, institutional and regulatory environment, as well as basic characteristics of the banking and financial sector. The models are developed and tested using a tenfold cross-validation approach and they are benchmarked against models developed with discriminant analysis and logistic regression.

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Authors and Affiliations

  1. Financial Engineering Laboratory, Department of Production Engineering and Management, Technical University of Crete, University Campus, 73100, Chania, Greece

    Chrysovalantis Gaganis, Fotios Pasiouras, Michael Doumpos & Constantin Zopounidis

  2. Department of Economics, University of Crete, Crete, Greece

    Chrysovalantis Gaganis

  3. Centre for Governance and Regulation, University of Bath School of Management, Bath, UK

    Fotios Pasiouras

Authors
  1. Chrysovalantis Gaganis
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  2. Fotios Pasiouras
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  3. Michael Doumpos
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  4. Constantin Zopounidis
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Correspondence to Constantin Zopounidis.

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Gaganis, C., Pasiouras, F., Doumpos, M. et al. Modelling banking sector stability with multicriteria approaches. Optim Lett 4, 543–558 (2010). https://doi.org/10.1007/s11590-010-0182-1

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