The purpose of the reserve

This approach is based on the precautionary principle, under which the bank loan portfolios are valued at the reporting date at net value, ie depending on grade and condition of the borrower's debt service. Reserve is formed in accordance with the actual amounts of credit debt into risk groups and the established norms of deductions that reflect the credit risk for each group of loans. On a group of standard loans formed a general reserve from profits of previous years. On loans, referred to other groups under control, substandard, doubtful and bad - created a special reserve, contributions to which are to costs of a commercial bank. If the risk is not justified and the loan was repaid, the profit in each future period is increased by a corresponding amount. If the reserve bank is not formed, then the loss must be recovered from the bank's equity capital. Significant risks can lead to complete loss of the bank's capital and its bankruptcy. Consequently, the creation of a reserve to avoid the negative impact of risk on the value of bank capital. Today, Ukrainian banks create such reserves as a reserve to compensate for possible losses on credit operations of banks reserves for accounts receivable, reserve fund to cover unexpected losses. Category: Management operations of commercial banks, News | Tags: provisioning