The next agenda item is the Allowance for Loan and Lease Losses (ALLL).  The ALLL, sometimes referred to as the loan-loss reserve, is a general reserve account maintained by the bank to absorb loan losses. 

Regardless of how well a bank’s lending is done, the bank will have loan losses. Unexpected events may disrupt even the most reliable borrower’s plans, and the result is some amount of loss for a bank. To absorb these losses, the bank maintains the allowance for loan and lease losses. 

In essence, the ALLL can be viewed as a pool of capital specifically set aside to absorb estimated loan losses. As a result, managing the ALLL balance is an important way that a bank manages its credit risk, and directors are responsible for ensuring that the ALLL balance is adequate.

This section of the course reviews the role played by the ALLL and outlines some issues to consider when determining its adequacy.