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Aspects of Absolute Evaluation of Financial Stability State of Commercial Banks
1  Vilnius Gediminas Technical University, Mykolas Romeris University, Vilnius, Lithuania

Abstract: Concern on financial stability of commercial banks is an ongoing issue, requiring permanent reviewing of regulatory frameworks and developing new approaches. Currently static regulatory methodologies are prevailing, which set pre-defined minimal requirements on limited financial parameters, such as capital or liquidity. The number of such indicative parameters cannot reflect overall performance of a bank because the set of monitored parameters is insufficient and because each financial stability parameter is monitored separately. Moreover, such parameters are static. Dynamic setting of values of minimal or desired parameters of financial performance of commercial banks should be more effective, in case we decide that we ought to vary requirements on banks over changing macroeconomic environment. Evaluation based on multiple criteria decision-aid (MCDA) methods comprises simultaneously several multidimensional criteria and provides results of evaluation in a clear form for both financier and everyman-depositor. Such an evaluation of financial stability state of the banks is providing more holistic approach. Moreover, it can considerably reduce information asymmetry between depositors and commercial banks, which may have positive effect on financial stability.Existing methodology of absolute MCDA evaluation provides an efficient tool of altering benchmark banks, hypothetical best and worst banks, comparing to which the evaluation is carried out, thus allowing to alter requirements for banks upon shifts of financial environment.
Keywords: Financial stability; MCDA; CAMEL; absolute evaluation; hypothetical banks
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