The relationship between the risk of failure and the global systemic importance of banks: A multicriteria evaluation approach

Abstract

Systemic risks constitute a major issue for financial stability, given the interconnectedness of financial institutions around the world. In this context, the identification of Global Systemically Important Banks (G-SIBs) is crucial, as it enables supervisors to spot potential sources of systemic risks at the global level and take mitigation actions. To this end, the Financial Stability Board (FSB), in consultation with the Basel Committee on Banking Supervision (BCBS), has built a methodology to identify G-SIBs. In this research, we employ a sample of banks over the years 2013–2018 and extend the FSB/BCBS methodology through the application of an outranking multicriteria decision aiding approach, combined with extensive sensitivity analysis based on simulations with respect to the criteria weights and the sample composition. Different schemes for aggregating the simulation results are examined in terms of their robustness. Moreover, we examine the relationship between the multicriteria evaluation for the global systemic importance of banks and their risk of failure. The results reveal that systemic importance is positively associated with their probability of default, thus indicating that additional special measures should be designed and implemented for monitoring the soundness of banks that have a major role in the global financial system.