Assessment of the Impact of Covid-19 on Loan Loss Provisions: an Empirical Analysis of Belgian Banks under IFRS9

Abstract

The unexpected arrival of the COVID-19 pandemic disrupted the global economy. It led to unprecedented levels of economic risk and uncertainty in global markets. The resulting widespread economic slowdown caused significant declines in income, job losses, and severe cash flow constraints for businesses and individuals. These combined factors likely impacted the quality of banks' financial reports, particularly in terms of evaluating loan loss provisions [LLP]. Therefore, this thesis explores the hypothesis that the pandemic may have led to a significant overestimation of LLPs in the financial statements of Belgian banks under IFRS 9.

First, this study defines and describes key concepts such as loan loss provisions, the IFRS 9 standard, and analyzes the economic and regulatory context in which Belgian banks operated during the COVID-19 pandemic. This theoretical foundation helps to better understand the issues and mechanisms that influence Belgian banks' provisioning practices during a major economic crisis. Following this, a quantitative study was conducted to address our previously stated hypothesis.

Contrary to initial expectations, our empirical analysis reveals that the pandemic did not have an immediate and significant impact on the LLP levels of Belgian banks under IFRS 9. This conclusion is supported by three distinct regression models, all of which converge towards the absence of a significant effect of the COVID period on LLPs.

However, an intriguing finding emerges from our third model: a significant decrease in LLPs during the post-COVID period compared to the pre-COVID period. While this result is interesting, it presents certain limitations and requires additional testing to verify its robustness. It raises important questions about the effectiveness of regulatory measures, and risk management strategies adopted by Belgian banks.

Our results also highlight the persistent importance of structural factors in determining LLP levels, particularly the size of the bank and its specialization (private or commercial). These intrinsic characteristics of banking institutions seem to play a decisive role in provisioning practices.

In conclusion, this study reveals that, contrary to initial expectations, the COVID-19 pandemic did not have an immediate and significant impact on the LLP levels of Belgian banks under IFRS 9. The results underscore the persistent importance of structural factors, such as the bank size and its specialization, in determining LLP levels. A significant decrease in LLPs during the post-COVID period for our sample was observed, raising questions about the effectiveness of regulatory measures and risk management strategies. This research contributes to a better understanding of banking practices during times of crisis and opens new avenues for further research.