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 to compare it with the stress level during past crises
• assess (in combination with the 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 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.