Rough Sets and the role of the monetary policy in financial stability (macroeconomic problem) and the prediction of insolvency in insurance sector (microeconomic problem)

• Published in: European journal of operational research Vol. 181; no. 3; pp. 1554 - 1573
• Main Authors: Sanchis, A., Segovia, M.J., Gil, J.A., Heras, A., Vilar, J.L.
• Format: Journal Article Conference Proceeding
• Language: English
• Published: Amsterdam Elsevier B.V 16.09.2007; Elsevier; Elsevier Sequoia S.A
• Series: European Journal of Operational Research
• Subjects: Applied sciences; Central bank independence; Central banks; Economic crisis; Economic stabilization; Exact sciences and technology; Financial stability; Guaranty funds; Insolvency; Insurance companies; Macroeconomics; Monetary policy; Operational research. Management science; Rough Sets; Studies; Spain; Financial stability; Central bank independence; Insurance companies; Rough Sets; Insolvency; Supervisor; Statistical analysis; Probabilistic approach; Roughness; Banking; Responsibility; Modeling; Crisis; Rough set theory; Uncertain system; Soundness; Financial policy; Insurance; Monetary policy; Insurance company; Macroeconomics; Bankruptcy
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2006.01.045

This paper faces two questions related with financial stability. The first one is a macroeconomic problem in which we try to further investigate the role of monetary policy in explaining banking sector fragility and, ultimately, systemic banking crisis. It analyses a large sample of countries in the period 1981–1999. We find that the degree of central bank independence is one of the key variables to explain financial crisis. However, the effects of the degree of independence are not linear. Surprisingly, either a high degree of independence or a high degree of dependence are compatible with a situation of financial stability, while intermediate levels of independence are more likely associated with financial crisis. It seems that it is the uncertainty related with a non-clear allocation of monetary policy responsibilities that contributes to financial crisis episodes. The second one is a microeconomic problem: the prediction of insolvency in insurance companies. This question has been a concern of several parties stemmed from the perceived need to protect general public and to minimize the costs associated such as the effects on state insurance guaranty funds or the responsibilities for management and auditors. We have developed a bankruptcy prediction model for Spanish non-life insurance companies and the results obtained are very encouraging in comparison with previous analysis. This model could be used as an early warning system for supervisors in charge of the soundness of these entities and/or in charge of the financial system stability. Most methods applied in the past to tackle these two problems are techniques of statistical nature and, variables employed in these models do not usually satisfy statistical assumptions what complicates the analysis. We propose an approach to undertake these questions based on Rough Set Theory.