Reassessing bank performance rankings: A non-compensatory composite indicator approach

Abstract

This paper introduces the development of a composite indicator (CI) constructed from financial ratios and grounded in a non‑compensatory multi‑criteria (NCMC) methodology to evaluate the performance of banking institutions. Based on nineteen indicators spanning five core dimensions: loan quality, capital quality, operating performance, profitability, and liquidity; the CI is designed to provide an indirect measure of institutional instability. The adoption of a non‑compensatory aggregation approach ensures that shortcomings in specific dimensions cannot be offset by strengths elsewhere. The methodology is demonstrated using data from the principal financial institutions operating in the Spanish banking market in 2020, three of which subsequently disappeared because of mergers or acquisitions. The findings show that these institutions were positioned in the lower tiers of the ranking generated by the indicator.