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Ukrainian Banks' Business Models Clustering: Application of Kohonen Neural Networks

Author

Listed:
  • Vladyslav Rashkovan

    (SD Capital)

  • Dmytro Pokidin

    (National Bank of Ukraine)

Abstract

This paper clusters and identifies six distinct bank business models using Kohonen Self-Organising Maps. We show how these models transform over the crisis and conclude that some of them are more prone to default. We also analyze the risk profiles of the bank business models and differentiate between safest (valid) and riskiest ones. Specifically, six risk types (Profitability, Credit, Liquidity, Concentration, Related parties lending, and Money Laundering) are used to build risk maps of each business model. The method appears to be an efficient default prediction tool, since a back-testing exercise reveals that defaulted banks consistently find their place in a "risky" region of the map. Finally, we outline several potential fields of application of our model: development of an Early Warning System, Supervisory Review and Evaluation Process, mergers and acquisitions of banks.

Suggested Citation

  • Vladyslav Rashkovan & Dmytro Pokidin, 2016. "Ukrainian Banks' Business Models Clustering: Application of Kohonen Neural Networks," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 238, pages 13-38.
    • Handle: RePEc:ukb:journl:y:2016:i:238:p:13-38
    DOI: 10.26531/vnbu2016.238.013
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    File URL: https://journal.bank.gov.ua/en/article/2016/238/02
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    References listed on IDEAS

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    1. Robert Thorndike, 1953. "Who belongs in the family?," Psychometrika, Springer;The Psychometric Society, vol. 18(4), pages 267-276, December.
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    More about this item

    Keywords

    Neural networks; clustering; SOM; business model; banking;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics

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