Banking Sector Risks Identification via GRA 9LUJLQLD 0ăUăFLQH &DPHOLD 'HOFHD ,RDQD %UDGHD (PLO 6FDUODW /LYLX &RWIDV Department of Economic Informatics and Cybernetics The Bucharest Academy of Economic Studies Bucharest, Romania camelia.delcea@yahoo.com Abstract—The present paper gives a new perspective on the banking risks and on their influences on the banking sector as a whole. Due to the actual financial crisis, the banks are facing more and more complex risks, with difficult to measure and manage impacts. Among these risks, the one coming from their inside structure were depicted and analyzed in the paper. The main aim of the research is to find whether there is a strong relation between the identified categories of risks and banks evolution and in an affirmative case to see if this relation depends also on the banking sector. For this, a powerful grey theory tool was used, namely the GRA (grey relational analysis). Also, a case study was considered for a number of 16 banks spread in 4 groups based on the banking sector they belong to. The results were concluding as it can be seen. Keywords— grey theory, grey relational analysis, risk, management, banking sector, rating, modeling I. INTRODUCTION In history are known several turbulent episodes, of which the most remarkable are: the tulip mania, the South Sea Bubble, the great crisis of 1929, the financial crisis from October 1987 and the latest financial crisis that broke out in 2007, continued in 2008 and 2009 and in some states existing at present. The financial crisis started in 2007 due to the reckless mortgage loans, is still an acute problem, despite the efforts submitted by governments, World Bank and central banks. Among the effects that this crisis has generated it can be mentioned: fluctuations on financial markets, solvency and liquidity problems of banks, lack of confidence of economic agents, harsh policies for granting credit. The main measure taken by the banks was to stop lending and trying to maximize their profit. Since it is impossible to know exactly how and when financial crises will occur in the future, it is important for the authorities not to neglect the changes that appear, but rather to take action in real time, and to adopt flexible policies. The effects of the actual crisis must be studied by specialists; and every country and bank institutions have to adopt the new financial order and its rules. For this, in the present paper an important place is given to the banking sector especially to the most important categories of risks that may appear in every bank and their impact on each bank’s profitability. Due to the fact that the banking sector doesn’t have the same characteristics in every country and region, a banking sector vision was imposed, and how could we group these banks if not by taking into account the environment in which they are living and mostly surviving? For this, a banking sector rating was considered as the main characteristic for grouping the banks taken into account. II. BANKING SECTOR RATING &RISKS After the beginning of the financial crisis, with reference to the 2008-2009, a big part of the criticism went to credit ratings assigned to banks as most failing banks had until then high investment statuses. Ratings were subject to accusation because of their specific use of evaluating default risk over the economic cycle. A credit rating constitutes in an assessment made by a credit rating agency on qualitative and quantitative information for the banks including exclusive information obtained by the credit rating agencies analysts form the banks and even third parties. The sensitive part of this process is the fact that credit ratings are not based on mathematical formulas. The ratings are based on the credit agencies knowledge and experience in deciding what part of the free information to use on one hand and which of the private information can be taken into consideration when giving a certain rating. In the banking sector the rating accuracy might be affected by the opacity and complexity related to the legal structure, risk exposures and the processes of value creation. Rating agencies assign a letter grade to each bond which represents an opinion as whether the organization will be able to repay both the principal and interest obligations as they become due. The ratings are built on a descending scale, AAA being the highest, AA second, A, BBB, BB, B etc. A rating of BB or below is associated with a high risk level. The three most important rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings. Moody’s Bank Financial Strength Ratings (BFSRs) represents an opinion of the bank’s intrinsic security and assurance while excluding certain external credit risks. Bank Financial Strength Ratings are a measure of the probability that the bank will need assistance from third parties like its owners, its industry group, or official institutions. The components considered in the evaluation of the Bank Financial Strength Ratings include bank specific factors such as financial fundamentals, franchise value, and business and asset diversification. [1] 978-1-4673-5248-2/13/$31.00 ©2013 IEEE 11