Bank credit losses: build the allowance bridge
A fictional Canadian lender needs a simplified expected-loss review. You have three loan groups and a roll-forward of the allowance. Explain the numbers without confusing a provision charge with an allowance balance.
Illustrative Finance Circle bank portfolio. Figures are fictional and are not RBC balances, policies or findings. RBC public reporting supplies the reading context.
Independent Finance Circle learning material. The source organisation does not sponsor, author or endorse this exercise.
Clarify. Structure. Calculate. Defend.
Take 2 minutes to clarify the decision and definitions, 3 minutes to structure the analysis, then work the exhibits. Finish with a concise recommendation and answer a follow-up. The time is a suggested practice format, not an employer requirement.
Clarify before solving
What are the data basis and reporting boundary?
Illustrative Finance Circle bank portfolio. Figures are fictional and are not RBC balances, policies or findings. RBC public reporting supplies the reading context.
Which assumptions can I use without requesting more data?
CAD millions unless stated. Use exposure × stated probability × loss-given-default for groups 1 and 2. Group 1 uses a supplied 12-month probability; group 2 uses a supplied lifetime probability. Group 3 loss is exposure minus expected recovery, with discounting ignored.
What decision am I expected to support?
Raise group-2 lifetime probability to 10%. Calculate revised group-2 loss, total allowance and additional provision versus the base case.
Build your structure
- Exposure groups and supplied loss methods
- Allowance by group and total exposure
- Provision roll-forward and write-offs
- Recovery assumptions and stress evidence
Use the branches that matter to this decision. A memorised framework is less useful than explaining why each analysis could change your recommendation.
Everything you need to work the case.
Assumptions & boundaries
- CAD millions unless stated. Use exposure × stated probability × loss-given-default for groups 1 and 2.
- Group 1 uses a supplied 12-month probability; group 2 uses a supplied lifetime probability. Group 3 loss is exposure minus expected recovery, with discounting ignored.
- This is a simplified teaching model, not a complete IFRS 9 estimate. No FX, acquisitions, recoveries or other allowance movements.
Illustrative loan portfolio
| Group | Exposure | Probability | LGD / recovery |
|---|---|---|---|
| 1 · performing | 70 | 1% | 40% LGD |
| 2 · higher risk | 20 | 8% | 45% LGD |
| 3 · impaired | 10 | Not used | Expected recovery: 6 |
Allowance roll-forward and stress
| Item | CAD million |
|---|---|
| Opening allowance | 4.2 |
| Net write-offs | 0.6 |
| Stress group-2 probability | 10% lifetime |
Choose the responsibility. Solve the decision.
Each level uses the exhibits above and asks a different question. Your entries stay in this open page only; copy your work before leaving.
Calculate a simplified allowance.
Calculate the loss for each group and total allowance.
Why is group 3 not exposure times the group-1 probability?
Numerical checks compare your arithmetic with the case model. Written recommendations are self-practice and are not automatically graded.
03 · Reveal worked solution & decision guide
Expected numerical answers
- Group 1 expected loss
- 0.28 CAD million
- Group 2 expected loss
- 0.72 CAD million
- Group 3 expected loss
- 4 CAD million
- Total allowance
- 5 CAD million
Work through the calculation
- Group 1: 70 × 1% × 40% = 0.28. Group 2: 20 × 8% × 45% = 0.72.
- Group 3: 10 − 6 = 4. Total = 0.28 + 0.72 + 4 = 5.
A strong concise response
My calculation shows that group 1 expected loss is 0.28 CAD million; group 2 expected loss is 0.72 CAD million; group 3 expected loss is 4 CAD million; total allowance is 5 CAD million. The allowance is a stock estimate. It is not the current-year income-statement charge or a realised cash loss.
Answer the interviewer follow-up
Why is group 3 not exposure times the group-1 probability?
The exercise specifies a separate recovery estimate for the impaired group. Use 10 minus 6; applying an unrelated probability would overwrite the supplied method.
Assessment rubric · 20 points
For self-review or mentor discussion. This rubric is not an automated written-answer grade or an employer scoring system.
Correctly derives all 4 numerical results for this level, keeps signs and units consistent, and explains the method.
Explains the objective: Calculate a simplified allowance. States the supplied scope, timing and metric definitions before calculating.
The allowance is a stock estimate. It is not the current-year income-statement charge or a realised cash loss. Addresses the interviewer follow-up without contradicting the facts.
Leads with a clear conclusion, distinguishes facts from assumptions, and identifies the next evidence needed. Does not claim the source company asked or endorsed this question.
Use full precision until the final rounding. Alternative written recommendations may be reasonable if they respect the facts and explain assumptions. This is Finance Circle’s guide, not an official source-company answer.
Source & attribution
The references below identify the public reporting, hiring guidance, research or mock-interview material used for context. Finance Circle wrote the exercise and its answers. Illustrative figures are explicitly identified; they are not company results or findings.
Public context; Finance Circle’s scenario inputs are illustrative.
Source reviewed 30 October 2026. No external page is needed to answer this exercise. Company names and logos identify sources only. All trademarks belong to their respective owners.