A statutory reserve that is created for the purpose of accounting for gains and losses in a financial institution’s invested assets. The reserve is designed to absorb both realized and unrealized, credit-related capital gains and losses. It consists of a default component, which provides a buffer against credit-related losses on fixed-income assets, and an equity component, which covers all types of equity investments.

An asset valuation reserve is part of capital and financial resources is set aside to cover any unexpected losses arising from debt and equity investments. Equity and credit losses are part of an entity’s business risks.