Bank Failure: A Multidimensional Scaling Approach

Mathematical models for the prediction of company failure are by now well established. Most of the work on multivariate modelling of distress prediction attempts to obtain a score that gives the failure probability of a company. A data set of 66 Spanish banks, 29 of which failed, is used to show that multidimensional scaling (MDS) techniques can be of use to produce simple tools for the analysis of financial health. MDS has the advantage of producing pictorial representations that are easy to interpret and use. This is done without loss of statistical rigour given the very close links between MDS and other multivariate statistical techniques that are normally used in the analysis of failure. As an example, the technique is used to trace the financial path of an ailing bank.