MODELING AND ASSESSMENT OF CREDIT RISK OF THE BANKING SYSTEM OF UKRAINE UNDER MARTIAL LAW

Abstract

The study focuses on modeling and assessing credit risk in Ukraine’s banking system under a full-scale war. The unprecedented Russian invasion caused a rapid, critical surge in Non-Performing Loans (NPLs) by early 2023. This NPL growth, driven by the destruction of borrowers' assets and income loss, poses severe threats to banks' liquidity. Traditional econometric models (standard logistic regression for PD estimation) proved insufficient. They failed to account for unique military-specific factors: abrupt macroeconomic changes, regional shocks, sudden infrastructure destruction, and mass migration, introducing unquantified risks. The key contribution is the adapted multifactor regression model. Leveraging logistic regression, it assesses credit risk in wartime by integrating classical macro-financial indicators (GDP, inflation, budget deficit) with new indicators of military activity and regional damage (e.g., destroyed enterprises and sector shocks) for accurate assessment of Probability of Default (PD) or Expected Losses (EL). The model, calibrated using 2022–2024 data, was validated for adequacy. It was applied to scenario stress testing using two key scenarios: a Baseline Scenario (moderate recovery, positive 2025 GDP growth, front-line stabilization) and an Adverse Scenario (intensified hostilities, deep recession, double inflation growth). Stress testing predicts a gradual NPL decrease over the medium term under the Baseline Scenario, stabilizing by late 2025. Conversely, the Adverse Scenario forecasts a potential NPL surge, necessitating substantial reserve increases. Overall findings confirm the Ukrainian banking system’s significant resilience and operational continuity, attributed to the National Bank of Ukraine's (NBU) conservative regulatory policy, high NPL coverage by reserves, and state risk-sharing programs. The system is also adapting by restoring suspended NBU regulations. The study provides practical recommendations: the NBU should deepen stress testing by integrating detailed regional and sectoral war risks. Commercial banks must maintain a conservative risk management policy, sustaining high provisioning, actively restructuring problem debt, and enhancing collateral valuation procedures.