Financial performance analysis of european banks using a fuzzified self-organizing map

Abstract

Due to the recent wave of bank failures, stress tests have been conducted on banks within the European Union. The stress tests, however, only consider the adequacy of a bank's capital ratios, whereas the general financial performance of individual banks is disregarded. In this paper, we use the Self-Organizing Map (SOM) to perform a visual multidimensional and temporal financial performance analysis of European banks. We address several different problems concerning financial performance analysis. We deal with the problem of selecting suitable financial ratios by performing dimensionality reduction using PCA. We also deal with difficult data using outlier trimming and normalization techniques, and use the SOM for imputing missing values. We use a decision-framework for choosing the final model, based upon a set of map and clustering quality measures. Finally, we implement a second-level fuzzified Ward clustering for visualization purposes and for assessing the crispness of the solution. The result is a visual SOM model for financial performance analysis of European banks. © 2011 Springer-Verlag.