Designing an expert knowledge-based Systemic Importance Index for financial institutions
Defining whether a financial institution is systemically important (or not) is challenging due to (i) the inevitability of combining complex importance criteria such as institutions’ size, connectedness and substitutability; (ii) the ambiguity of what an appropriate threshold for those criteria may be; and (iii) the involvement of expert knowledge as a key input for combining those criteria. The proposed method, a Fuzzy Logic Inference System, uses four key systemic importance indicators that capture institutions’ size, connectedness and substitutability, and a convenient deconstruction of expert knowledge to obtain a Systemic Importance Index. This method allows for combining dissimilar concepts in a non-linear, consistent and intuitive manner, whilst considering them as continuous –non binary- functions. Results reveal that the method imitates the way experts them-selves think about the decision process regarding what a systemically important financial institution is within the financial system under analysis. The Index is a comprehensive relative assessment of each financial institution’s systemic importance. It may serve financial authorities as a quantitative tool for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be the greatest. It may also serve for enhanced policy-making (e.g. prudential regulation, oversight and supervision) and decision-making (e.g. resolving, restructuring or providing emergency liquidity).
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (57-1) 3431111
Fax: (57-1) 2841686
Web page: http://www.banrep.org/publicaciones/pub_borra.htm
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:bdr:borrec:669. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Camilo Millán)
If references are entirely missing, you can add them using this form.