The allowance for loan and lease losses (ALLL), sometimes referred to as the loan-loss reserve, is a general reserve account maintained by the credit union to absorb loan losses. A combination of unexpected events or problem borrowers disrupts even the most reliable credit union’s plans, and the result is some amount of loss. To absorb these losses, credit unions maintain the allowance for loan and lease losses.
ALLL is capital specifically set aside to absorb estimated loan losses. As a result, managing the ALLL balance is an important way that a credit union manages its credit risk, and directors are responsible for ensuring that the ALLL balance is adequate.