Loan Loss Reserve

A loan loss reserve is an accounting provision set aside by a bank or financial institution to cover potential losses from loans that may not be repaid. It acts as a financial cushion, reflecting the institution’s expectation that some borrowers might default. This reserve helps maintain the institution's financial stability by recognizing potential risks upfront, ensuring that the bank can absorb losses without harming its overall financial health. Essentially, it’s a proactive measure to account for the possibility of future loan defaults, supporting prudent risk management.