We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is a Loan Loss Reserve?

John Lister
Updated: Jan 20, 2024

A loan loss reserve is an accounting method used to reflect the risk that not all loans made by a bank will be repaid. In each accounting period, a bank will list a certain amount, known as a provision for loan losses, designed to reflect these potential losses as a hypothetical expense. The relevant amount can then be listed as an asset on balance sheets. This loan loss reserve ensures the bank has enough money on hand to cover defaults.

Although contributions to a loan loss reserve are listed on a bank's income statement, the contributions are not an actual cash expense. Instead they simply reflect the necessary adjustments to the figures to make sure adequate money is set aside. Because the money is listed both as an expense and an addition to assets, the bank will act as if it has spent the money. Therefore the money remains untouched in the bank until it is needed.

Once a bank has set up a loan loss reserve, there are four ways in which the amount of the reserve can change. One is charge-offs, which occur when a bank gives up on trying to collect an outstanding loan. This loss is counted as an expense on the income statement, and then also deducted from the reserve figure on the balance sheet.

Another change happens in the event that a loan that has been charged off in this way is actually recovered. This is relatively rare. If it happens, the figure for the reserve is increased appropriately.

The third change comes at the end of the accounting period. The bank will usually list a provision for loan losses designed to bring the loan loss reserve back to its intended level. The amount listed will thus match the total amount charged off during the accounting period, minus any previously charged off loans that have been recovered.

The fourth change is any adjustment the bank makes to the loan loss reserve in order to reflect its loan portfolio. The amount is based on a percentage of the outstanding loans, so the loan loss reserve will usually increase as the total loan amount increases, although the percentage used may change depending on how risky the bank believes the loans are overall. It is therefore technically possible that a bank might increase the total value of its lending while cutting the size of its loan loss reserve, or vice versa.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
John Lister
By John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With a relevant degree, John brings a keen eye for detail, a strong understanding of content strategy, and an ability to adapt to different writing styles and formats to ensure that his work meets the highest standards.
Discussion Comments
John Lister
John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.