The Relationships Between Credit Risk, Liquidity Risk, And Bank Stability In Ukraine

As Ukraine is an emerging market, its banking sector provides a compelling context to examine the relationship between credit risk and liquidity risk. Over the past years, the sector has been confronted with various formidable challenges, including political instability, economic turmoil, ongoing war with Russia, and the impact of the COVID-19 pandemic. Consequently, these factors have significantly elevated credit risk and liquidity risk, posing obstacles to banks’ profitability and stability. The Ukrainian banking system is currently facing a challenging situation. On the one hand, there is a dire budget deficit in the country. On the other hand, the banks are inundated with excess liquidity, estimated at around UAH 400 billion, namely deposit certificates plus balances on correspondent accounts. Banks are being reluctant to invest in government bonds due to low interest rates as they are significantly lower than the interest rates of deposit certificates (Vinokurov, Economichna Pravda ("Economic Truth"), 2022). In this research, two hypotheses are tested. The first hypothesis suggests a positive relationship between liquidity risk and credit risk, indicating that they tend to increase or decrease in conjunction with each other. The second hypothesis suggests that credit risk and liquidity risk, individually and/or jointly, have a positive effect on the probability of default. This implies that when credit risk and liquidity risk are present, the bank’s stability decreases. The research utilizes panel data for Ukrainian banks covering the period from January 2016 to March 2023 on a quarterly basis. The reason for starting the data collection from 2016 is due to the transformation of the Ukrainian banking system during that year. The National Bank of Ukraine (Statistics. Supervisory Data) is the source of all bankspecific information collected for the research.