What are common reserve targets?

What are common reserve targets?

• A. 1.5 - 2 times annual losses
• B. 0.5 times annual losses
• C. 3.0 times annual losses
• D. 5.0 times annual losses

Answer: (A)

Reserves are built to absorb losses a lease portfolio may incur, including what is expected and what could unexpectedly occur as delinquencies grow or recoveries lag. sizing the reserve as a multiple of annual losses provides a practical cushion tied to the portfolio’s risk level and cash-flow timing. The typical target of about 1.5 to 2 times annual losses strikes a balance: it offers enough protection for adverse scenarios and timing gaps between defaults and charge-offs, without tying up capital more than necessary. If reserves were only 0.5 times annual losses, the cushion could be too thin in stress periods, risking capital shortfalls. On the other hand, reserves of 3 to 5 times annual losses would be overly conservative for most portfolios and would unnecessarily damp return on capital. The exact level should reflect portfolio characteristics like risk concentration, seasoning, and geographic risk, but aiming around 1.5–2x annual losses is a common, prudent practice.

Reserves are built to absorb losses a lease portfolio may incur, including what is expected and what could unexpectedly occur as delinquencies grow or recoveries lag. sizing the reserve as a multiple of annual losses provides a practical cushion tied to the portfolio’s risk level and cash-flow timing. The typical target of about 1.5 to 2 times annual losses strikes a balance: it offers enough protection for adverse scenarios and timing gaps between defaults and charge-offs, without tying up capital more than necessary. If reserves were only 0.5 times annual losses, the cushion could be too thin in stress periods, risking capital shortfalls. On the other hand, reserves of 3 to 5 times annual losses would be overly conservative for most portfolios and would unnecessarily damp return on capital. The exact level should reflect portfolio characteristics like risk concentration, seasoning, and geographic risk, but aiming around 1.5–2x annual losses is a common, prudent practice.