A provision that is created and held against impairments in the performing portfolio (of loans and credits) that have been incurred as a result of events occurring before the balance sheet date but which have not been identified and recognized at the balance sheet date.
An entity usually develops policies for estimation of latent loss provisions in order to account for the probability of default, historical loss experience adjusted where appropriate, current economic and credit conditions; and the period between an impairment event occurring and a loan (or credit) being identified and reported as impaired.
As the name implies, latent losses are those currently unobserved but can be inferred from accounting and financial data.
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