Provision for Credit Losses (PCL)
Expense set aside to cover expected loan defaults.
Definition
The provision for credit losses is a charge taken against earnings to build or maintain a bank's allowance for loan losses. Under the current expected credit losses (CECL) accounting standard, banks must estimate lifetime expected losses on their loan portfolios. Higher provisions reduce net income but strengthen the bank's ability to absorb defaults.
Why It Matters
Provisions are one of the most closely watched bank metrics because they reflect management's view of credit quality trends. A spike in provisions often precedes rising charge-offs and can signal deteriorating economic conditions.