Allowance for Loan and Lease Losses (ALLL)

The ALLL is a bank’s best estimate of the amount it will not be able to collect on its loans and leases based on current information and events. To fund the ALLL, the bank takes a periodic charge against earnings. Such a charge is called a provision for loan and lease losses.

Director responsibilities for the ALLL include:

  • overseeing management’s judgments and estimates used to arrive at the ALLL balance;
  • reviewing and approving the bank’s written ALLL policies and procedures at least annually;
  • reviewing management’s assessment and justification that the loan review system is sound and appropriate for your institution;
  • reviewing management’s assessment and justification for the amounts estimated and reported each period for the ALLL provision; and
  • requiring management to periodically validate and revise, when appropriate, the ALLL methodology.

See the Interagency Policy Statement on the Allowance for Loan and Lease Losses, in Federal Reserve Letter SR 06-17, dated Dec. 13, 2006. This document discusses matters to consider in arriving at an adequate ALLL. The "Framework for Determining an Adequate ALLL" under the Learn More column may also be useful.