PERIODYK NAUKOWY AKADEMII POLONIJNEJ 30 (2018) nr 5 43 ESTIMATION OF Z-SCORE FOR UKRAINIAN BANKING SYSTEM Bohdan Kyshakevych Professor, DSc, Polonia University, e-mail: b_kyshakevych@ukr.net, orcid.org/0000-0001-5721-8543, Poland Ivan Klymkovych Post-graduate student, Drohobych Ivan Franko State Pedagogical University, e-mail: ivan_klymkovych@ukr.net, orcid.org/0000-0002-8255-5901, Ukraine Abstract. The article analyzes the problematic aspects of evaluating the financial stability of banking systems on the basis of the Z-score methodology. The econometric model estimation of Z-score for the Ukrainian banking system was constructed where the following indicators were chosen in role of explanatory variables: the share of foreign capital in bank system, inflation, change in nominal GDP and share of overdue loans in credit portfolio. We have conducted the analysis of the banking sector in Ukraine on the base of the constructed Z- score model and determined macroeconomic factors that have the most significant impact on the Z-score assessment and banking system stability. Drawbacks and limitations of the Z- score methodology usage in banking business are discussed. Keywords: Z-score, banking system, stability of bank, risk measure, bank bankruptcy, Ukrainian banking system. DOI: http://dx.doi.org/10.23856/3003 Introduction The way how to measure bank risk and bank stability has always an important academic interest, especially in the post-crisis period. Traditionally, the most commonly used risk measures by financial institutions are VaR and ES. VaR was recommended by Basel II Accord as a standard risk measure for bank risk management. However, VaR is often criticized that it is not a coherent risk measure, as Value-at-risk is not sub-additive and cannot capture any loss beyond the VaR loss level (the so-called “tail risk”). ES has been developed to overcome VaR’s shortcomings, and is recommended in Basel III. However, another weakness for both VaR and ES is that they measure mainly the risk of an individual institution, and cannot fully capture systemic risk. One of the most popular risk measures in the literature related to estimation of banking and financial stability on the macro and micro level is z-score, which evaluates a bank’s probability of insolvency. Boyd and Graham (1986) in their studies proposed the z-score approach as a risk indicator, that can measure the probability that a bank will fail or go bankrupt. Subsequently, Boyd and Graham (1988) and Boyd et al. (1993) also used z-score methodology as a measure of the probability of bank bankruptcy, and investigate the risk effects of bank mergers with non-bank financial company. Literature reviews and theoretical framework Today we can come across many approaches in the scientific literature that help to analyze the stability of either banks or entire banking system. In the literature, one of the most