EconPapers    
Economics at your fingertips  
 

Designing an expert knowledge-based Systemic Importance Index for financial institutions

Carlos León () and Clara Machado ()

Borradores de Economia from Banco de la Republica de Colombia

Abstract: 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).

Keywords: Systemic Importance; Systemic Risk; Fuzzy Logic; Approximate Reasoning; Too-connected-to-fail; Too-big-to-fail. (search for similar items in EconPapers)
JEL-codes: C63 D85 E58 G28 (search for similar items in EconPapers)
Date: 2011-08
References: Add references at CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.32468/be.669 (application/pdf)

Related works:
Working Paper: Designing an expert knowledge-based Systemic Importance Index for financial institutions (2011) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:669

Access Statistics for this paper

More papers in Borradores de Economia from Banco de la Republica de Colombia Cra 7 # 14-78. Contact information at EDIRC.
Bibliographic data for series maintained by Clorith Angélica Bahos Olivera ().

 
Page updated 2022-05-18
Handle: RePEc:bdr:borrec:669