Determinants of loan loss provisions in Serbian banks: The effect of COVID-19 and geopolitical turmoil

In 2014, the IASB introduced IFRS 9 with the innovative ECL model, allowing for more timely and accurate credit loss recognition. While existing research has examined ECL during the COVID-19 crisis, there is limited focus on its behavior amid geopolitical instability. Our study addresses this gap by extending the analysis to include recent conflicts such as the Russia-Ukraine war and the Israeli-Palestinian conflict. Covering the period from 2019 to 2023, our empirical analysis is based on 95 bank-year observations from 19 banks over five years. Findings reveal a significant shift of loans from Stage 1 to Stage 2, with no substantial increase in Stage 3 loans. The average cost of risk tripled during global disruptions, highlighting the substantial impact of these crises on credit risk and loan loss provisions. The results show that higher proportions of unsecured household loans and investment corporate loans significantly increase loan loss provisions. However, government measures mitigated this effect for unsecured household loans during downturns, while the impact remains for investment corporate loans. Additionally, banks with a larger share of mortgage loans during distress periods are generally expected to incur lower losses compared to peers.