Hierarchical Fuzzy Cognitive Maps for Financial Risk Monitoring Using Aggregated Financial Concepts

This study addresses the gap between predictive optimization and monitoring-oriented risk concentration by introducing a hierarchical Fuzzy Cognitive Map (FCM) framework for financial risk assessment. Financial distress prediction models are employed to estimate firm-level default probabilities and are required to comply with regulatory standards. IFRS 9 and Basel III/IV frameworks emphasize model explainability, scenario analysis and causal transparency, which are essential for compliance purposes. The methodology aggregates correlated financial ratios into financial concepts through unsupervised clustering. Concepts interact through a learned coupling matrix and a controlled multi-step propagation, which enables the amplification of risk signals. A small residual correction is applied at the final readout, preserving the interpretability of the proposed framework. The framework was applied to two severely imbalanced benchmark bankruptcy datasets. It achieved higher precision–recall performance than Logistic Regression (PR–AUC ≈0.32 vs. 0.27), improved calibration (Brier score ≈0.046 vs. 0.089) and maintained competitive Recall@Top–K under tight supervisory monitoring budgets. Hierarchical FCM achieved predictive performance comparable to nonlinear models while maintaining concept-level interpretability. Our findings demonstrate that structured concept aggregation combined with interaction-based propagation provides a transparent alternative to purely predictive black-box models in financial distress assessment and is aligned with regulatory frameworks.