A Heatmap for Monitoring Systemic Financial Stability Risks in Ukraine

Abstract

This study presents an updated risk map of the Ukrainian financial sector – an analytical tool for identifying and monitoring the buildup and materialization of systemic risks. The risk map methodology that the National Bank of Ukraine used until 2021 has been revised to ensure that risk assessment is based on reliable quantitative indicators rather than expert judgements, as well as to extend the list of risks considered. The instrument allows the stability of the financial system to be assessed across key risks, such as macroeconomic risk, the credit risks of households and non-financial corporations, capital adequacy risk, profitability risk, liquidity risk, and foreign exchange risk. We introduce indicators that capture a wide range of economic and financial vulnerabilities and group them by risks. Each risk category contains from four to seven indicators that combine both actual data and expectations. Statistical checks show that the indicators clearly signal previous crisis episodes, as well as the buildup of vulnerabilities during the research period. We find that macroeconomic risk and foreign exchange risk have the best explanatory and predictive power, while the weaker performance of other risks could result from structural changes in the banking sector over the past decades that have affected the overall risk profile of the financial sector.