Are banks provisioning enough for loan losses? Find out in Cleveland Fed’s Forefront

Are banks provisioning enough for loan losses? The answer appears to be yes, although it’s hard to know for sure, say Cleveland Fed banking supervisors and an industry observer

The levels of bank reserves for covering loan losses are nearly back to pre-crisis levels. That may mean the banking industry is out from under the overhang of bad debts that has plagued it, but the question remains: Would the reserves be enough in the event of another financial crisis?

According to banking supervisors and an industry observer interviewed for Forefront, the Federal Reserve Bank of Cleveland’s policy publication, shrinking loan loss reserves are not currently a cause for concern due to higher capital levels and lower loan delinquencies at banks, better monitoring systems, and an improving economy.

Forefront also highlights a big change on the horizon that will impact banks’ loan loss reserves. The change in financial reporting to what is called the CECL model (Current Expected Credit Loss impairment model) will require bankers to recognize expected losses over the life of a loan rather than provisioning based on actual losses, as they do now.

To find out more, read Return to Normalcy?

Additional info can be found in Loan-Loss Provisioning and in a recent FedPerspectives webinar, that will be available here on 11/6.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892