Systemic Importance Index for Financial Institutions: A Principal Component Analysis approach

Systemic Importance Index for Financial Institutions: A Principal Component Analysis approach

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Carlos León
Andrés Murcia


As a result of the most recent global financial crisis, literature has embraced size, connectedness and substitutability as key indicators for financial institutions’ systemic importance. This paper applies Principal Components Analysis to some metrics for assessing size, connectedness and substitutability, where those metrics rely on a combination of balance sheet data and the application of network theory to large-value payment system’s information. The main results are the following: (i) the three concepts and their metrics are explanatory and non-redundant for differentiating financial institutions’ relative systemic importance; (ii) these metrics allow the construction a PCA-based Systemic Importance Index, a valuable tool for financial authorities’ policy and decision-making; and (iii the importance of the too-connected-to-fail criteria and the presence of non-banking firms among the most systemically important financial institutions in the Colombian case are confirmed.

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