Loan Loss Reserves

Loan loss reserves are funds that a bank sets aside to cover potential losses if some borrowers fail to repay their loans. They act as a financial safety net, helping the bank manage risk and maintain stability. When a bank predicts that certain loans might not be fully repaid, it increases these reserves to prepare for those possible losses. This practice ensures the bank can absorb potential financial hits without jeopardizing its overall health or ability to lend. In essence, loan loss reserves provide a cushion against future loan defaults.