Systemic Importance Index for Financial Institutions: A Principal Component Analysis Approach

León, Carlos; Murcia, Andrés

doi:10.2139/ssrn.2179607

Cited by 15 publications

(30 citation statements)

References 18 publications

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“…FLIS and PCA) are non-redundant. Moreover, all in all, results concur with those of León and Machado (2013) and León and Murcia (2012).…”

Section: Introductionsupporting

confidence: 91%

“…Such increasing interest in the impact of systemic shocks -beyond the interest in their frequency -results from the intrinsic characteristics of financial and payments systems. As pointed out by Haldane (2009), León et al (2012) and León and Berndsen (2013), financial and payments networks today may be described as robust to random disturbances, but highly susceptible to targeted attacks. 12 This results from the systemic importance of financial institutions (e.g.…”

Section: Systemic Risk and Systemic Importancementioning

confidence: 99%

“…Furthermore, the equal and fixed weighted scheme proposed by BCBS-BIS may yield undesired results, such as biasing results towards the most volatile categories, and may naively assume that all financial systems are similar to each other. 7 Unlike the BCBS-BIS (2013) proposal, León and Machado (2013) and León and Murcia (2012) tackle the first challenge by using balance sheet data and an application of network analysis to the large-value payment system's data. They both design four indicators or metrics for assessing size, connectedness and substitutability for the Colombian financial system.…”

Section: Introductionmentioning

confidence: 99%

“…Regarding the second challenge, León and Machado (2013) employ a fuzzy logic inference system (henceforth a FLIS), an engineering-type approach based on the deconstruction of expert knowledge into a method that imitates the way experts themselves think about the decision process regarding what a systemically important financial institution is. Au contraire, based on the same metrics, León and Murcia (2012) implement principal component analysis (PCA), a standard (i.e. purely quantitative) dimension reduction method.…”

Section: Introductionmentioning

confidence: 99%

“…Hindsight, along with discussions and comments received by the authors of both research works 8 , encouraged enhancing and condensing the preceding proposals into the present document. Thus, based on the aggregation methods by León and Machado (2013) and León and Murcia (2012), this document aims to identifying systemically important financial institutions with respect to three new systemic importance metrics: (i) money 7 Other drawbacks of the BCBS-BIS (2013) methodological proposal are briefly discussed in León and Machado (2013). Other comments to the consultative document are posted in the BIS' webpage (http://www.bis.org/publ/bcbs201/cacomments.htm).…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Macro-prudential assessment of Colombian financial institutions' systemic importance

Rincon

Machado

Murcia

2013

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This document presents an enhanced and condensed version of preceding proposals for identifying systemically important financial institutions in Colombia. Three systemic importance metrics are implemented: (i) money market net exposures network hub centrality; (ii) large-value payment system network hub centrality; and (iii) an adjusted assets measure. Two complementary aggregation methods for those metrics are implemented: fuzzy logic and principal component analysis.The two resulting indexes concur in several features: (i) the ranking and remoteness of the top-two most systemically important financial institutions; (ii) the preeminence of credit institutions in the indexes; (iii) the appearance of a brokerage firm in the top-six; (iv) the skewed nature of the indexes, which match the skewed (i.e. inhomogeneous) nature of the three metrics and their approximate scale-free distribution.The indexes are non-redundant and provide a comprehensive relative assessment of each financial institution's systemic importance, in which the choice of metrics pursues the macro-prudential perspective of financial stability. The indexes may serve financial authorities as quantitative tools for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. They may also serve them for enhanced policy and decision-making.

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“…FLIS and PCA) are non-redundant. Moreover, all in all, results concur with those of León and Machado (2013) and León and Murcia (2012).…”

Section: Introductionsupporting

confidence: 91%

Section: Systemic Risk and Systemic Importancementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Macro-prudential assessment of Colombian financial institutions' systemic importance

Rincon

Machado

Murcia

2013

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Assessing Systemic Importance With a Fuzzy Logic Inference System

León

Machado

Pabón

2015

Intell. Sys. Acc. Fin. Mgmt.

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Three metrics are designed to assess Colombian financial institutions' size, connectedness and non-substitutability as the main drivers of systemic importance: (i) centrality as net borrower in the money market network; (ii) centrality as payments originator in the large-value payment system network; and (iii) asset value of core financial services. An aggregated systemic importance index is calculated based on expert knowledge by using a fuzzy logic inference system. We use principal component analysis to calculate a benchmark index for comparison purposes. Overall similarities between both indexes put forward that expert knowledge aggregation is consistent with that based on a purely quantitative standard approach. Specific non-negligible differences concur with the nonlinear features of an approach whose intention is to replicate human reasoning. Both indexes are complementary and provide a comprehensive relative assessment of each financial institution's systemic importance in the Colombian case, in which the choice of metrics pursues the macroprudential perspective of financial stability.The Basel Committee on Banking Supervision (2013) suggests adding two criteria (i.e. cross-jurisdictional activity and complexity) in order to attain banks' global systemically importance and the difficulty of resolving a systemic event. Because this paper focuses on nonglobal banking and nonbanking institutions' systemic importance, and as derivatives and other complex instruments are rather scarce in the Colombian market, the criteria are limited to size, connectedness and substitutability, as originally suggested by IMF et al. (2009). However, the proposed aggregation method is able to consider these two (or other) criteria. 2 There is an alternative to indicator-based approaches as the one proposed here: a model-based approach, which uses quantitative models to estimate financial institutions' contributions to systemic risk. However, as highlighted by Basel Committee on Banking Supervision (2013: 5): 'models for measuring systemic importance of [financial institutions] are at a very early stage of development and concerns remain about the robustness of the results; [for instance, the] models may not capture all the ways that a [financial institution] is systemically important (both quantitative and qualitative)'. 122 C. LEÓN ET AL.

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Key Borrowers Detected by the Intensities of Their Short-Range Interactions

Aleskerov

Andrievskaya

Permjakova

2016

Models, Algorithms and Technologies for Network Analysis

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The issue of systemic importance has received particular attention since the recent financial crisis when it came to the fore that an individual financial institution can disturb the whole financial system. Interconnectedness is considered as one of the key drivers of systemic importance. Several measures have been proposed in the literature in order to estimate the interconnectedness of financial institutions and systems. However, most of them lack an important dimension of this characteristic: intensities of agent interaction. This paper proposes a novel method that solves this issue. A distinctive feature of our approach is that it takes into consideration not just the interconnectedness of agents but also their interaction intensities. The approach is based on the power index and centrality analysis and is employed to find a key borrower in a loan market. To illustrate the feasibility of our methodology we apply it at the European Union level and find key countries-borrowers. JEL Classification: C7, G2.

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Systemic Importance Index for Financial Institutions: A Principal Component Analysis Approach

Cited by 15 publications

References 18 publications

Macro-prudential assessment of Colombian financial institutions' systemic importance

Macro-prudential assessment of Colombian financial institutions' systemic importance

Assessing Systemic Importance With a Fuzzy Logic Inference System

Key Borrowers Detected by the Intensities of Their Short-Range Interactions

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