An Empirical study on fuzzy C-means clustering for Turkish banking system

Altınel, Fatih
Banking sector is very sensitive to macroeconomic and political instabilities and they are prone to crises. Since banks are integrated with almost all of the economic agents and with other banks, these crises affect entire societies. Therefore, classification or rating of banks with respect to their credibility becomes important. In this study we examine different models for classification of banks. Choosing one of those models, fuzzy c-means clustering, banks are grouped into clusters using 48 different ratios which can be classified under capital, assets quality, liquidity, profitability, income-expenditure structure, share in sector, share in group and branch ratios. To determine the inter-dependency between these variables, covariance and correlation between variables is analyzed. Principal component analysis is used to decrease the number of factors. As a a result, the representation space of data has been reduced from 48 variables to a 2 dimensional space. The observation is that 94.54% of total variance is produced by these two factors. Empirical results indicate that as the number of clusters is increased, the number of iterations required for minimizing the objective function fluctuates and is not monotonic. Also, as the number of clusters used increases, initial non-optimized maximum objective function values as well as optimized final minimum objective function values monotonically decrease together. Another observation is that the ‘difference between initial non-optimized and final optimized values of objective function’ starts to diminish as number of clusters increases.


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Citation Formats
F. Altınel, “An Empirical study on fuzzy C-means clustering for Turkish banking system,” M.S. - Master of Science, Middle East Technical University, 2012.