A type of credit enhancement whereby a reserve (specifically, a cash reserve) is created by a bank for the purpose of covering potential losses that may arise from unlikely repayment (or likely uncollectibility) of loans extended to customers. The reserve is set aside, as an income statement expense, to account for default risk associated with borrower-customers.

The reserve for loan loss account appears on the asset side of a bank’s balance sheet as an adjustment (deduction) from the gross amount of loans (this deduction it is considered a contra asset account). The total book value of a bank’s loans net of the loan loss reserve (an item known as net loans) should reflect the best estimate of the net realizable value (NRV) of the loan portfolio as at the financial statement date.

It is known for short as LLR.