Ronald W. Spahr

A Multiple Criteria Framework to Evaluate Bank Branch Potential Attractiveness

Remarkable progress has occurred over the years in the performance evaluation of bank branches. Even though financial measures are usually considered the most important in assessing branch viability, we posit that insufficient attention has been given to other factors that affect the branches’ potential profitability and attractiveness, such as: location features, trade area characteristics and facilities management. Based on the integrated use of cognitive maps and multiple criteria decision analysis, we propose a framework that adds value to the way that potential attractiveness criteria to assess bank branches are selected and to the way that the trade-offs among those criteria are obtained. This framework is the result of a process involving several directors from the five largest banks operating in Portugal, and follows a constructivist approach. Our findings suggest that the use of cognitive maps systematically identifies previously omitted criteria that may assess potential attractiveness. The use of multiple criteria techniques clarify and add transparency to the way trade-offs are dealt with. Advantages and disadvantages of the proposed framework are also discussed.

Evaluating retail banking service quality and convenience with MCDA techniques: a case study at the bank branch level

The intangibility of banking services makes the evaluation of service quality and customer convenience difficult to measure. This paper aims to construct an integrated evaluation system for retail banking service quality and convenience at the bank branch level by combining cognitive mapping with measuring attractiveness by a categorical based evaluation technique. We strive to introduce transparency in the decision making process and add to the performance literature in retail banking. Strengths, weaknesses and practical applications of our multiple criteria evaluation system are also discussed.

Readjusting trade-offs among criteria in internal ratings of credit scoring: an empirical essay of risk analysis in mortgage loans

Credit-scoring becomes increasingly important in poor economies and recessions. Decreasing liquidity due to reduced access to both money and debt markets has induced banks to impose restrictions on offering credit, including credit for mortgage loans. In this paper we analyze the internal rating system used by one of the top-five banks in Portugal, and propose a methodological framework which, based on an application of the Delphi technique, allows adjusting trade-offs among evaluation criteria and provides decision makers with a fairer, more accurate and transparent mortgage risk evaluation system.

Using multiple criteria decision analysis (MCDA) to assist in estimating residential housing values

Considerable literature exists regarding the complexity of the residential real estate appraisal process and the methods employed to determine initial listing prices as estimates of intrinsic market prices. Deviations in residential real estate intrinsic values occur due to a multiplicity of attributes and explanatory factors requiring consideration. We conduct a panel study using a Multiple Criteria Decision Analysis (MCDA) based framework that utilizes the skills and knowledge of a panel of residential real estate professionals (i.e. appraisers and realtors). We demonstrate how cognitive mapping and the Measuring Attractiveness by a Categorical Based Evaluation Technique (MACBETH) may assist in estimating appropriate offer/sale prices and strengthening current valuation approaches such as using comparables and/or hedonic modeling. The managerial implications of our MCDA-based framework and some avenues for future research are also presented.

How to create indices for bank branch financial performance measurement using MCDA techniques: an illustrative example

Most banks have been negatively affected by the recent economic recession, which has forced them to evaluate their operating performance including the financial performance of bank branches. Approaches that have been applied to address the financial performance evaluation of bank branches include: optimization techniques, simulations, stochastic tools, fuzzy logics and decision support systems. Although recent improvements have been made in assessing financial performance, the potential for significant further improvement remains since the recent world economic crisis is adding pressure on business margins. The purpose of this paper is to construct an exemplificative evaluation index for bank branch financial performance by integrating cognitive maps with measuring attractiveness by a categorical based evaluation technique. We aim to apply this methodology constructively to serve as a learning mechanism and introduce transparency in the decision making process. Practical applications, strengths and weaknesses of the proposed evaluation index are also discussed.

The Value of Federal Sponsorship: The Case of Freddie Mac

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 attempts to limit the risk borne by the taxpayer due to federal sponsorship of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association by: (1) controlling their range of activities; (2) requiring a level of capital sufficient to absorb substantial losses; and (3) providing a mechanism for closure if capital is insufficient. This article estimates the impact of the capital standards on the value to the FHLMC of federal sponsorship. Although FHLMCs level of capital exceeds requirements, the federal government still bears a nontrivial portion of the FHLMCs risk.

Predicting bank failures and intertemporal assessment of bank risk

Abstract Two concepts currently under consideration that may be used by regulators to compensate for the actuarial differences in risk among insured depository institutions are risk-based capital requirements and risk-based deposit insurance premia. Both concepts, however, require a methodology to assess the riskiness of the institution. This study develops and tests factors in an intertemporal framework that may be used to appropriately assess risk. The results of the study indicate that the time frame prior to possible insolvency of the institution is critical for both the appropriate factors and the weighting of the factors in a discriminant-type model.

Preference Trade-Offs In Capital Budgeting Decisions

Abstract Capital budgeting analysis may be characterized as an attempt to satisfy a set of potentially conflicting objectives. Corporate managers may be faced with multiple and conflicting objectives. The wide-spread acceptance of prioritized objectives in capital budgeting has stimulated the adoption of pre-emptive goal programming models. This paper presents a procedure to model a goal programming based capital budgeting model as a polynomial expression where inter-and intra-goal trade-offs can be achieved subject to the marginal rates of substitution between preference levels.

Comparing Mean Reverting Versus Pure Diffusion Interest Rate Processes in Valuing Postponement Options

Using a simulation approach, we analyze the effect of mean reversion on the value of capital budgeting postponement options. Two interest rate processes are compared: a pure diffusion process and a stochastic mean reversion process. The mean reverting process generates interest rate paths that are consistent with historically observed rates. Because option values depend not only on the variance of rates but also on the pattern of rate diffusion across time, a pure diffusion process may lead to significant mispricing of options if the true process is mean reverting. We analyze mispricing for different yield curve scenarios and as a function of the differencing interval used to measure volatility.

A prioritisation index for blight intervention strategies in residential real estate

Abstract The existence of abandoned or poorly maintained properties, often with overgrowth, litter, and abandoned junk – or “neighbourhood blight” as it is sometimes referred to – is a complex and wide-ranging real estate problem. Its detrimental impact on neighbourhood property values, safety and reputation requires an elucidation of where its causes lie, which in turn requires that areas of intervention first be identified. The need is for multidimensional solutions which take into account different stakeholders’ interests and perceptions. To address this need, this paper integrates cognitive mapping and multiple criteria decision analysis (MCDA) and, based on the discussion of real world cases with a panel of urban planning experts from the Lisbon municipality in Portugal, constructs a blight intervention prioritisation index. The resulting framework was validated by the participating panel members and a representative of the city council, and is aimed at facilitating strategies for intervention and elimination of residential neighbourhood blight..