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What does the provision for loan and lease losses represent?

Realized losses from the previous accounting period

Management's estimate of potential losses

The provision for loan and lease losses represents management's estimate of potential losses on loans and leases that may occur due to borrowers' inability to repay their obligations. This estimate is crucial for banks as it helps to ensure that they maintain adequate reserves to cover anticipated losses, thereby reflecting a proactive approach to risk management.

By recognizing these potential losses upfront, banks can present a more accurate picture of their financial condition. This provision impacts the bank's financial statements by being recorded as an expense, which reduces the bank's reported net income in the period it is recognized. This accounting practice helps maintain the solvency and integrity of the bank's financial reporting.

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Determined by the Federal Reserve for all banks

Affects net income positively

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