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HAVE BANKS RECOGNIZED AN INCREASE IN EXPECTED CREDIT LOSSES ON FINANCIAL INSTRUMENTS IN THE PANDEMIC YEAR? – EVIDENCE FROM CROATIAN BANKS

The COVID-19 disease, which emerged in late 2019 and spread to the world in 2020, has affected all aspects of social and economic life around the world. Measures taken by governments to combat the COVID-19 pandemic have led to a significant reduction in economic activity, which has led many businesses to face significant financial difficulties. As clients of many banks faced financial difficulties, banks were exposed to a significant increase in credit risk. To manage the increase in credit risk, banks modified the parameters for estimating expected credit losses, which affected the recognition of impairment losses and loss allowances in banks' financial statements. The main objective of this paper is to investigate whether banks in Croatia have recognized an increase in impairment losses on expected credit losses on financial instruments in the year of the pandemic. Furthermore, the objectives of this paper are: (a) to establish a correlation between impairment losses on financial instruments and the financial position in the Croatian banking sector ; (b) determine the correlation between impairment losses on financial instruments and the financial performance of the Croatian banking sector ; and (c) determine whether these correlations have changed in the pandemic 2020 compared to 2019. The survey covered all banks in Croatia. The data required to conduct the survey were collected from publicly available annual reports of banks for 2019 and 2020. Descriptive statistical methods and correlation analysis were used to meet the objectives of the paper. The results of the research suggest that most banks in Croatia in the pandemic 2020 compared to 2019 recognized an increase in impairment losses due to increased credit risk of debt financial instruments caused by the COVID-19 pandemic. The results also indicated a strong negative correlation between impairment losses and the financial position of Croatian banks in the pandemic 2020 and a moderately negative correlation in pre-pandemic 2019. In both years there was a strong negative correlation between impairment losses and financial performance. According to the results of the research, the increase in impairment losses in the pandemic 2020 did not have a serious impact on the financial position, but it had a strong negative impact on the financial performance of Croatian banks.

impairment loss, credit risk, loss allowance, banks, Croatia

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