A proposal for a composite indicator based on ratios (CIBOR) to compare the evolution of Spanish financial institutions

Abstract

This paper introduces a new Financial Stress Indicator (FSI) named Composite Indicator Based on Ratios (CIBOR). This paper discusses the importance of monitoring the quality of loans and capital, operational performance, profitability, and liquidity of financial institutions to prevent systemic risks in the financial system. To address this, CIBOR is proposed as a means to indirectly capture the instability of a financial entity by identifying potential tensions and their underlying causes. Specifically, we compare the results for 25 financial entities operating in the Spanish banking market, analysing the evolution since 2018 to 2022. CIBOR permits a straight interpretation of the variations between periods and a dynamic analysis that not only measures the variation between the ratios over time, but also identifies the sources of such variations: variations derived from changes in sub-indicators, changes stemming from the oscillation of the baseline, and the impact of the selection of weights in the construction of the composite indicator.