Provisioning (Loan Loss Provisions)
Setting aside funds to cover potential loan defaults.
Detailed Description
Provisioning (Loan Loss Provisions)
What are loan loss provisions?
Loan loss provisions are accounting entries made by financial institutions to account for potential losses on loans that may not be fully repaid.
Why are loan loss provisions important for banks?
They provide a realistic reflection of a bank's financial health and help manage risk while maintaining regulatory capital requirements.
How are loan loss provisions calculated?
They are calculated using historical data, current economic conditions, and the creditworthiness of borrowers, often employing statistical models.
What is the difference between specific and general provisions?
Specific provisions are for identified loans at risk of default, while general provisions cover potential losses across the entire loan portfolio.
What regulatory guidelines affect loan loss provisions?
Regulatory bodies like FASB and IFRS impose guidelines to ensure consistency and transparency in financial reporting, including the CECL model in the U.S.