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"Too big to fail? An analysis of the Colombian banking system through compositional data"

Author

Listed:
  • Juan David Vega Baquero

    (PhD student, University of Barcelona, Spain.)

  • Miguel Santolino

    (Riskcenter, Department of Econometrics, University of Barcelona, Diagonal 690, 08034-Barcelona, Spain. Tel.:+34-93-4020484; fax: +34-93-4021983.)

Abstract

Although still incipient in economics and finance, compositional data analysis (in which relative information is more important than absolute values) has become more relevant in statistical analysis in recent years. This article constructs a concentration index for financial/banking systems by means of compositional analysis, to establish the potential existence of too big to fail financial entities. The intention is to provide an early warning tool for regulators about this kind of institutions. The index has been applied to the Colombian banking system and assessed over time with a forecast to determine whether the system is becoming more concentrated or not. It was found that the concentration index has been decreasing in recent years and the model predicts that this trend will continue. In terms of the methodology used, compositional models were shown to be more stable and to lead to better prediction of the index than the classical multivariate methodologies.

Suggested Citation

  • Juan David Vega Baquero & Miguel Santolino, 2021. ""Too big to fail? An analysis of the Colombian banking system through compositional data"," IREA Working Papers 202111, University of Barcelona, Research Institute of Applied Economics, revised Apr 2021.
    • Handle: RePEc:ira:wpaper:202111
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    File URL: http://www.ub.edu/irea/working_papers/2021/202111.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Simplex; Aitchison geometry; Systematically important banks; Vector autoregresion. JEL classification: G17; G21; G28.;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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