TraceRiskFunctional AreasAdministrationAllowance for Loan & Lease Loss Risk

Allowance for Loan & Lease Loss Risk

Use Case:
The purpose of the ALLL is to reflect estimated credit losses within a bank’s portfolio of loans and leases. Estimated credit losses are estimates of the current amount of loans that are probable that the bank will be unable to collect given the facts and circumstances since the evaluation date (generally the balance sheet date). That is, estimated credit losses represent net charge-offs that are likely to be realized for a loan or group of loans as of the evaluation date. The ALLL is presented on the balance sheet as a contra-asset account that reduces the amount of the loan portfolio reported on the balance sheet. The risk to the bank is that the ALLL is miscalculated which can lead to over / underfunding of the allowance and provision accounts, erroneous Call Reporting and adverse capital, earnings, regulatory and reputational implications.

Who Should Assess the Risk: Chief Credit Officer, Chief Lending Officer, Credit Administrator, Chief Financial Officer