General Guidance for Developing Differential Premium Systems

October 31, 2011
Methodology used for the selection of quantitative indicators
The process of quantitative indicator selection needed to reflect not only the
standard rules of risk analysis, but also specifics of the Kazakhstani economic
environment and its current stage of maturity. In order to choose the most
valuable financial ratios from a broad range of indicators, statistical methods
such as correlation, t-test, and factor analysis were used.
An expert judgement was applied to divide banks into normal and problem
banks due to the lack of reliable and comparable statistics concerning results
of normal and liquidated bank activities. The main reason for that is that
Kazakhstan is an emerging market. Statistical methods were then applied to
select the most valuable indicators in order to include them in the testing
process.
For each of the quantitative indicators, an algorithm was developed to justify
the transformation of the actual values of the indicators into the resulting
“score” as a final output of the model. Use of the indicators’ numerical values
and their weights based on the factor loadings of each indicator is done
through the Factor Analysis. Other methods are based on defining intervals
of actual indicator values that can be achieved.
Quantitative Indicators
The Kazakhstani DPS ‘BATA’ utilizes 14 quantitative indicators with the
maximum total score of 115 points. The table below presents a summary of
the quantitative ratios and preliminary weights of indicators that are used in
the methodology. The ratios have been classified into 5 categories as follows:
Code Category Ratio Name Max.
Weight
C Capital Coefficient k1-1 of Prudential norms 30
Adequacy Coefficient k2 of Prudential norms
Coefficient k1-2 of Prudential norms
A Assets Classified assets / Assets 5
46