Financial performance analysis of European banks using a fuzzified Self-Organizing Map

Peter Sarlin*, Tomas Eklund

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

7 Citations (Scopus)

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 problems concerning financial performance analysis. We deal with the problem of selecting suitable financial ratios by performing dimensionality reduction using Principal Component Analysis. 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. In addition, 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.

Original languageEnglish
Peer-reviewed scientific journalInternational Journal of Knowledge-based and Intelligent Engineering Systems
Volume17
Issue number3
Pages (from-to)223-234
Number of pages12
ISSN1327-2314
DOIs
Publication statusPublished - 2013
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • European banks
  • Financial performance analysis
  • fuzzified clustering
  • self-organizing map
  • visualization

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