The reserve a lender builds through charges against earnings for the loan losses it expects, which brings the loans on its books down to the amount it expects to collect.
Every lender expects some loans not to be repaid in full. The allowance for credit losses is the amount it has set aside for that, built by charging earnings. Under current accounting it covers expected losses on loans carried at amortized cost, and the capital rule calls the version it counts the adjusted allowances for credit losses. Older filings call it the allowance for loan and lease losses.
It matters to a borrower because it counts toward how much a bank can lend. The capital rule lets a bank include the allowance in tier 2 capital up to 1.25 percent of its risk-weighted assets. The national bank lending limit rule then adds back the part tier 2 leaves out, so the whole allowance ends up in capital and surplus, the base for the 15 percent limit on loans to one borrower. For a bank using the community bank framework, the base is simply tier 1 capital plus the allowance.
A larger allowance does not mean a bank is lending more or less. It is one input to loan size, not a view on any one deal.
How it shows up in the data here
The allowance is not shown as its own line, but it is inside three figures on each bank page. The estimated largest single loan, CRE to capital and construction to capital all use tier 1 capital plus the allowance, taken from the FDIC's Call Report data. These are our calculations, not ratings. See the data dictionary for the fields, or try your own numbers in the lending limit estimate.
Go further
- Data dictionary: The capital and allowance fields behind each bank page.
- Legal lending limit estimate: Enter tier 1 capital and the allowance to see a loan size.
- Legal lending limit estimate: The most a bank can lend to one borrower, from public capital figures. Always an estimate.
- How to read a bank call report as a loan searcher: Every bank files a call report each quarter. One schedule in it lists the bank's loans by kind. Read that schedule and you know what the bank holds. You still do not know what it made last quarter.
- The legal lending limit, explained: A bank may not lend more than a set share of its capital to one borrower. The rule explains why a large loan gets shared, and why a lender can say a request is too big for it.
Related terms
- Tier 1 capital: A bank's core capital under the capital rule: common equity tier 1 plus additional tier 1. The minimums are 6 percent of risk-weighted assets and a 4 percent leverage ratio.
- Total risk-based capital: The sum of a bank's tier 1 and tier 2 capital. The capital rule requires it to be at least 8 percent of the bank's risk-weighted assets.
- Capital and surplus: The capital base a national bank's lending limit is measured against: tier 1 and tier 2 capital plus the part of the loan loss allowance that tier 2 leaves out.
- Legal lending limit: The most a bank may have outstanding to one borrower by law. For national banks it is 15 percent of capital and surplus, plus 10 percent more when the extra is fully secured by readily marketable collateral.
- Call report: The financial report every bank and savings association files with its federal regulator each quarter, with a balance sheet, an income statement and schedules that break out loans by kind.
Sources
- 12 CFR 324.2, capital rule definitions, retrieved .
- 12 CFR 324.20, capital components and eligibility criteria, retrieved .
- 12 CFR 32.2, lending limit definitions, retrieved .
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.