Question

Describe what a "loan loss provision" is for a commercial bank.

How does a charge to loan loss provisions impact current earnings for a bank?

What happens if future actual losses are less than what was set aside with such provisions?

Answer 1

loan loss provision in a provision which has been set aside by the commercial bank in order to deal with the bad and uncollectible loans.

this provision reflect the conservative approach of the bank in order to record the expenses and losses which they think that cannot be recoverable in nature

Charge to loan loss account would be resulting into decrease in total earnings of the company in the financial statement.

The current earnings can get minimised heavily on the downside by loan loss account.

if the future actual losses are less than actual record, it would be resulting into the unexpected gain and it will write back those expenses and record them as gains.