The allowance for credit losses coverage ratio at U.S. banks stood at 1.66% in the first quarter of 2026, down just slightly from 1.67% the previous quarter, according to a new analysis published by the Federal Reserve Bank of St. Louis this month. The stability signals that banks aren't expecting a wave of loan defaults anytime soon, even as economic uncertainty remains elevated across the country.
The ACL coverage ratio—which measures how much banks set aside to cover potential loan losses as a percentage of total loans and leases—has declined gradually over the past six quarters from a recent peak of 1.78% at the end of the third quarter of 2024. Banks have experienced controlled rates of loan delinquencies and charge-offs in recent years, which has kept provision expenses stable as a percentage of their loan portfolios. The current 1.66% ratio stands well below the 2.23% peak reached during the COVID-19 pandemic in 2020, when economic uncertainty spiked and banks dramatically increased their loss reserves.
The report explains that every time a bank makes a loan, there's some likelihood that a percentage won't be repaid, so banks establish loan loss reserves by debiting an income statement expense account called "provision for credit losses" while crediting a balance sheet account called "allowance for credit losses." The analysis finds that despite elevated levels of economic uncertainty, banks have not made significant adjustments to their ACL coverage ratios. According to the report, banks and regulators closely watch this ratio because it reveals important insights about a bank's loan portfolio and risk assessment.
What does this stability mean? The report notes that a high ACL coverage ratio suggests a bank expects high loan losses ahead, which could indicate a riskier loan portfolio, economic pessimism about borrowers' ability to repay, or deteriorating loan quality. A low ratio suggests fewer expected losses, which might mean a higher-quality loan portfolio, economic optimism about repayment prospects, or strong collateral backing the loans. Neither high nor low is inherently good or bad—the appropriate level varies for every bank depending on its lending strategy, the economic environment, and the types of loans issued. The controlled delinquencies and losses banks have seen in their credit portfolios have supported the gradual decline over the past year and a half.
For the public, monitoring ACL coverage ratios across banks provides insight into how financial institutions view economic health and lending risk. The report states that sudden increases in ACL coverage ratios may signal higher uncertainty or economic trouble ahead, while decreases might indicate improving confidence. Right now, banks appear to be holding the line—neither bracing for a storm nor celebrating clear skies, but maintaining steady reserves despite the uncertain backdrop.