The Cost of Funds is the amount of interest expense paid for the funds used. Funding Credit . The amount earned by the bank on the deposits employed. The difference between the interest earned and the interest expense. Loan Loss Provision .
All loans have risk, and some loans never get repaid.
The Loan Loss Provision is a pool of dollars reserved by banks to cover expected loan losses. Capital Allocation . Capital allocation is the amount of capital set aside for each product to cover unexpected losses and is based on the overall risk profile of the product. Capital Charge . The capital allocated multiplied by the bank's desired rate of return on the capital assigned to the product.