--- title: "Allowance for Credit Losses: definition, formula, and thresholds" description: "The allowance for credit losses (ACL), called the allowance for loan and lease losses (ALLL) before the CECL standard, is the reserve a bank holds against losses it expects on its loans. It is deducted from gross loans on the balance sheet, and under CECL it covers expected losses over each loan's whole life." canonical_url: https://www.bankregreports.com/glossary/allowance-credit-losses/ source: BankRegReports category: "Asset Quality" units: "$" schedule: "Schedule RI-B, RC" --- # Allowance for Credit Losses > The allowance for credit losses (ACL), called the allowance for loan and lease losses (ALLL) before the CECL standard, is the reserve a bank holds against losses it expects on its loans. It is deducted from gross loans on the balance sheet, and under CECL it covers expected losses over each loan's whole life. ## Formula ``` Ending ACL = Beginning ACL + Provision for Credit Losses - (Charge-Offs - Recoveries) ``` The allowance rolls forward each period. The bank adds the provision for credit losses, an expense on the income statement, and subtracts net charge-offs, loans written off less recoveries on loans written off before. Call Report Schedule RI-B, Part II reconciles the movement, and the ending balance appears on Schedule RC as a deduction from loans. The size of the provision comes from the bank's CECL estimate of lifetime losses on the current portfolio, based on loss history, current conditions and reasonable forecasts. ## Why it matters The allowance absorbs expected credit losses before they reach capital. If it is too small for the risk in the loan book, future losses will hit earnings and capital at once. Examiners and auditors test its adequacy at every examination and audit, and up to 1.25% of risk-weighted assets of it counts as tier 2 capital. ## How to read it Read the allowance as ratios. ACL to total loans shows reserve depth: most US banks hold roughly 1% to 1.5%. ACL to non-performing loans, the coverage ratio, shows how many dollars of reserve stand behind each dollar of troubled loans. A large allowance is not good or bad in itself; a credit card lender needs far more reserve than a residential mortgage lender, so compare banks with similar loan mixes. ## Thresholds | Range | Reading | What it means | |---|---|---| | Ample coverage of NPLs | Strong | Reserve comfortably exceeds non-performing loans. | | Adequate | Adequate | Allowance consistent with the loan mix and loss history. | | Thin vs. risk | Watch | Reserve light relative to non-performing loans or loan mix. | | Under-reserved | Concern | Allowance well below likely losses; capital is the next line of defense. | ## Worked example At June 30, 2026, JPMorgan Chase Bank, N.A. held an allowance for credit losses on loans of $25,942 million against total loans of $1,561,577 million, a reserve of 1.66% of loans. Its noncurrent loans (nonaccrual plus 90 days past due) were $12,169 million, so the allowance covered them 2.1 times. Wells Fargo Bank, N.A. held $13,910 million against $997,790 million of loans, 1.39%. ## Questions ### Is the allowance for credit losses the same as the allowance for loan losses? It is the successor. The allowance for loan and lease losses (ALLL) covered losses already incurred; the CECL-era allowance for credit losses covers expected lifetime losses and also applies to held-to-maturity securities and some off-balance-sheet commitments. ### What is a loan loss reserve? Loan loss reserve is the everyday name for the allowance for credit losses on loans. It is a balance sheet reserve, not cash set aside, and it reduces the carrying value of the loan book. ### What is the difference between the allowance and the provision for credit losses? The allowance is the balance on the balance sheet. The provision is the expense in the period that tops the allowance up after charge-offs and changes in expected losses. ### How much allowance should a bank hold? Enough to cover expected lifetime losses on its current loans. Most US banks hold about 1% to 1.5% of loans, more for credit cards and unsecured lending and less for residential mortgages. ### Does a bigger allowance mean a bank is safer? Not by itself. It can mean prudent reserving or a riskier loan book, so read it against charge-off history and the coverage of non-performing loans. ## Sources - [FFIEC Call Report Schedule RI-B, Part II (Changes in Allowances for Credit Losses)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF) - [FFIEC Call Report Schedule RC (Balance Sheet), item 4.c](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF) - FASB ASC Topic 326, Financial Instruments: Credit Losses (CECL) ## Related metrics - [Allowance for Credit Losses / Loans](https://www.bankregreports.com/glossary/acl-loans/): ACL/Loans measures the bank's reserve for expected credit losses as a percentage of total loans. Under the CECL (Current Expected Credit Loss) standard (effective in 2020 for large SEC filers and on January 1, 2023 for most other institutions), this reserve covers losses expected over the life of each loan, not just incurred losses. - [Loan Loss Coverage Ratio](https://www.bankregreports.com/glossary/coverage-ratio/): The coverage ratio measures the bank's loan loss reserve against its non-performing loans. It answers: how many times over could the bank's reserves absorb its current problem loans? - [Provision for Credit Losses](https://www.bankregreports.com/glossary/provision-credit-losses/): The provision for credit losses is the expense a bank records to build or maintain its allowance for credit losses. Under the CECL standard it reflects expected lifetime losses, and it sits between revenue and net income on the income statement. - [Net Charge-Off Ratio](https://www.bankregreports.com/glossary/nco-ratio/): The Net Charge-Off ratio (annualized) measures loans actually written off as uncollectible (less subsequent recoveries) divided by average loans outstanding. It is the realized credit loss experience of the bank. - [Non-Performing Loans Ratio](https://www.bankregreports.com/glossary/npl-ratio/): A non-performing loan (NPL) is a loan whose borrower has stopped paying as agreed: the bank has put it on nonaccrual because full collection is doubtful, or it is 90 or more days past due. The NPL ratio divides those loans by total loans. Regulators call them noncurrent loans. ## About this document This is the markdown twin of the page named in `canonical_url` above. 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