Asset Quality
Allowance for Credit Losses
Also known as ACL, Allowance for Loan Losses, Allowance for Loan and Lease Losses, ALLL, Loan Loss Reserve
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.
How the allowance for credit losses is calculated
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.
- Start with the allowance at the beginning of the period (Schedule RI-B, Part II).
- Add the provision for credit losses charged to earnings in the period.
- Subtract charge-offs and add back recoveries on loans charged off earlier.
- The result is the ending allowance. Divide it by total loans for the ACL-to-loans ratio, or by non-performing loans for the coverage ratio.
Worked example
Source: FFIEC Call Report, quarter ended June 30, 2026: allowance for credit losses on loans and leases (RCFD3123), total loans (RCFD2122), and Schedule RC-N nonaccrual (RCFD1403) and 90 days past due (RCFD1407) loans.
Why does the allowance matter?
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.
Reserves are the last check in a loan portfolio analysis: whether the allowance covers the losses the loans are likely to produce.
How do you interpret the allowance?
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.
How much allowance should a bank hold?
| Range | Label | Interpretation |
|---|---|---|
| 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. |
Frequently asked
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)
- FFIEC Call Report Schedule RC (Balance Sheet), item 4.c
- FASB ASC Topic 326, Financial Instruments: Credit Losses (CECL)
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