Penalizing realms before any battles, looting or takeovers are fought is problematic and unrealistic. It's a poor mechanic by game play standards, in that it can be abused, and it's poor by role play standards as well, as it doesn't make sense and contrives the setting.
This game would do well to borrow from the war exhaustion systems of other games. Europa Universalis, for instance, gives you a war exhaustion rating. The score of the rating scales the size of the penalties you receive and is influenced by battles, occupied regions, blockades and other such things. The merit of this system is that it penalizes players only for things that have actually happened, and so it is both balanced and realistic.
Because, you see, it's the consequences of war that should matter, not merely the fact of war itself. Peasants should care if there are foreign armies marching through their lands, or if their sons are being sent off to die in battles. Currently, they do not care about that at all, instead they care about their state's diplomatic situation and are completely ambivalent towards the effects of the war; they merely care about the existence of war. It makes no sense and should be changed.