Loan Loss Provision
Candlefocus EditorThe provision is an important way for banks to cover the risk associated with lending. Regular measures of bad loans on the balance sheet, called non-performing loans, give banks the ability to accurately measure their level of risk. Banks need to have a certain level of these provisions in case of defaults, and their provisions must be replenished over time as loans are paid off and replaced with new ones. Banks must continually assess their balance sheets to ensure that their loan loss provision accounts accurately for potential customer loans defaulting.
The provision also accounts for other loan expenses, such as legal costs, costs associated with foreclosure proceedings, and costs associated with collecting on delinquent loans. Additionally, the loan loss provision can also be used to purchase additional loan loss reserves, although this is much less common. In some cases, additional reserves can be used to finance new loan growth, allowing the bank to make additional loans without having to increase its balance sheet provision.
The loan loss provision is an important part of managing a bank's risks and ensuring that they are able to present an accurate financial statement. It is important for banks to keep track of their loan loss provisions in order to ensure that their balance sheets remain healthy and that their customer accounts remain in good standing. By setting aside a loan loss provision, banks are able to protect themselves from the potential losses associated with lending money, and by regularly assessing the size of the provision, they can keep their balance sheets healthy.