Development of a methodology of evaluation of financial stability of commercial banks

TLDR

Evaluation of commercial bank financial stability has progressed from simple risk‑return models to complex macro‑microeconomic approaches, yet existing rating agency and ECB methods fail to reduce market information asymmetry. The study aims to develop a methodology that reduces information asymmetry in commercial bank evaluation by comparing different MCDA methods. The methodology compares various MCDA techniques to assess commercial banks. The study shows that Lithuania’s financial system is bank‑based, with household deposits as the primary source, and its stability depends mainly on depositor behavior.

Abstract

The field of evaluation of financial stability of commercial banks, which emanates from persistent existence of financial crisis, induces interest of researchers for over a century. The span of prevailing methodologies stretches from over-simplified risk-return approaches to ones comprising large number of economic variables on the micro- and/or macro-economic level. Methodologies of rating agencies and current methodologies reviewed and applied by the ECB are not intended for reducing information asymmetry in the market of commercial banks. In the paper it is shown that the Lithuanian financial system is bankbased with deposits of households being its primary sources, and its stability is primarily depending on behavior of depositors. A methodology of evaluation of commercial banks with features of decreasing information asymmetry in the market of commercial banks is being developed by comparing different MCDA methods.