Management overlay (provisions)
What is a management overlay in a bank's loan loss provisions?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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A management overlay is an adjustment a bank makes to the provisions its models produce, to cover risks the models do not capture: a new economic shock, a sector under strain, a model known to lag. It is disclosed in the accounts, and it should carry a reason, an owner and a way of being released as the risk either appears in the loans themselves or passes. An overlay released to meet a profit target, with nothing changed in the book, has become a smoothing tool.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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