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On Financial Stress Index

The Financial Stress Index (FSI) is an indicator representing the stress level in the financial sector of Ukraine. The FSI takes on a range of values from 0 to 1, where 0 means a total absence of stress and 1 means the highest level of stress. The FSI demonstrates only the current standing of the financial sector, but it does not reflect any future risks.

The Financial Stress Index allows analysts to:

  • measure the stress level of the financial system
  • assess the depth and duration of the period of instability of the financial markets and compare it with the stress level during past crises
  • assess (in combination with other indicators) the efficiency of anti-crisis measures
  • determine whether the nature of shocks to the financial system and its separate components is systemic or ad hoc.

The key events influencing the financial market of Ukraine are shown on the chart below. In particular, the FSI peaked shortly after the Lehman Brothers bankruptcy. The next episode of rapid growth in the FSI occurred during the crisis of 2014–2015. This increase fell short of the previous peak, but lasted much longer. Only after the launch of talks on debt reprofiling in 2015 did the stress level start to decline substantially. After the quarantine was announced in March 2020, the index grew for some time, but already in early June it diminished to the level that was observed at the beginning of the COVID-19 pandemic.

The full-scale russian invasion in 2022 caused a sharp increase in the index. All of its components have risen, which indicates the systemic nature of stress in the financial sector. At first, the high values of the FSI were driven by the growth of returns on the securities market, the volatility of the exchange rate on the FX market, the high level of FX interventions, and the refinancing of the banks by the National Bank of Ukraine to maintain their liquidity. Only the level of the household behavior sub-index remained relatively low thanks to public confidence in the banking system. The absence of deposit outflows restrained the index growth in general. Over time, the levels of most sub-indices decreased. However, already in July 2022, in anticipation of the government debt restructuring, the yield on government and corporate securities rose sharply. Interest rates on household deposits also increased, and volatility in the FX market remained stable. Therefore, the FSI rose to the March level.

After the successful debt restructuring and a temporary decrease in the index, attacks on the energy infrastructure became a new shock to the financial system. The banking and FX sub-indices rose instantly as fluctuations in the FX market intensified. High values of several indices increased the level of stress. However, already at the beginning of November, when the economy adjusted to the new attacks, the FSI decreased, which continued until the spring of 2023.

In 2023, the volatility of the FSI was still present, and the main reason for the increase was the high simultaneous movement of several sub-indices. The households sub-index has grown gradually, primarily due to a further rise in interest rates on hryvnia deposits. The current interest rate increases are not related to deposit outflows, and thus are not evidence of additional pressure on liquidity. Rather, they reflect tighter monetary conditions, which exacerbate the challenges that financial system is facing. The banking sub-index also increased as a result of a certain deterioration in liquidity indicators, but it was still the lowest of all of the FSI components. The sub-index of government securities remained high because of an increase in yields on sovereign Eurobonds. Along with that, the narrowing of the spread between the official and cash exchange rates and a decrease in volumes of the NBU’s FX interventions led to a gradual decline in the foreign currency market sub-index.

Calculation methodology for Ukraine’s FSI

The FSI is calculated based on 20 indicators that are grouped under five sub-indices, one each for the banking sub-index, household behavior, corporate, government debt, and the foreign currency market sub-index. Each sub-index is assigned an initial weight according to its volume and effect on the financial sector of the country.

Aggregation of sub-indices is done by means of econometric modeling (multivariate GARCH – generalized autoregressive conditional heteroskedasticity). The method’s unique feature is that it takes into account the change in relationships between the indicators (sub-indices) over time. As a rule, correlation between the sub-indices increases in times of crisis. The higher it is, the larger is the probability that the stress will spread to the entire financial sector, becoming systemic.

The periods of rapid growth in the FSI coincide with the periods that were identified as crisis episodes by the interviewed financial experts.

For a more detailed description of the method, follow the link.