The taxonomic credit risk measure is a composite value, a resultant of all the variables (economic and financial ratios) describing the condition of local self-government units. The condition of local self-government units is evaluated by comparing the value of the selected variables for these units with their value for a hypothetical local self-government unit, i.e. a "model unit".
The starting point for creating the taxonomic credit risk measure is to calculate the value of variables for the model local self-government unit. These are the optimum values of the respective variables that describe the condition of local self-government units. For stimultant variables these are the maximum levels, and for destimultant variables - the minimum levels observed among all the local self-government units subject to the comparison. If a comparative analysis covers several periods, optimum values are set as the lowest or highest values recorded among all the local self-government units under comparison in all the periods subject to analysis. A model local self-government unit is therefore an ideal standard, to which all other local self-government units are compared. Formally, the local self-government units being compared and the model local self-government unit are represented by points in the space of variables that describe them. The dimension of space (the number of axes that determine the dimension) is equal to the number of variables that describe the condition of local self-government units. The next step is to standardize the value of selected variables. This allows one to eliminate measurement units and avoid a higher share of variables with a higher level in the value of the credit risk measure.
Values of composite risk measures (just as group risk measures) are obtained by calculating the distance of respective points representing local self-government units from the point representing the model local self-government unit. The weighed average formula was used in the PONT Info standard. The better the condition of a local self-government unit (lower credit risk), the shorter the distance from the point representing it to the point representing the model local self-government unit. Due to the appropriate normalization, both group risk measures and the composite risk measure are always within the range of [0;1]. The lower the risk of financing a local self-government unit (i.e. the better its condition is), the lower the corresponding risk measure (closer to zero). The higher the risk of financing a local self-government unit (i.e. the worse its condition), the higher the corresponding risk measure (closer to one).