Allowance for Loan Losses (ALL)
Reserve set aside on the balance sheet to cover expected loan losses.
Definition
The allowance for loan losses is a contra-asset on the bank's balance sheet representing management's estimate of expected credit losses in the loan portfolio. It is built up through provisions and drawn down through charge-offs. The coverage ratio (ALL / NPLs) indicates how well-reserved the bank is.
Why It Matters
An adequate allowance signals that the bank has honestly assessed its credit risks and pre-funded expected losses. Under-reserving inflates near-term earnings but creates a cliff risk if losses materialize faster than expected.