Modelling banking sector stability with multicriteria approaches

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 the banking sectors 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 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 problems. We use a sample of 114 banking sectors, 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 10-fold cross-validation approach and they are benchmarked against models developed with discriminant analyis and logistic regression.