Banks make money by borrowing from depositors, e.g., at 1%, and lending to businesses, e.g., at 4%. In this case, they would make 3% on the total amount of loans they made.
The above chart shows the increasing levels of equity that a bank is required by regulators carry to as a percentage of Asssets (loans) that it makes. For example, if a bank makes $100M in loans, it must carry at least $10.5M in equity plus "capital buffers" (last line) to guard against its loans going bad. With 10.5% buffer, if 10.5% of its loans default, the bank will still have enough to pay back depositors.
You can see why banks want to keep this number low, as it allows them to make more loans, and earn more money.
FASB, the accounting regulators are also trying to make banks realize losses as soon as they know about them, a provision that would reduce their ability to lend as loans default:
The rule, which the FASB issued in 2016, represents a fundamental shift in how banks treat loan losses. Currently, they don’t record losses until they have evidence the losses will actually occur. Supporters of the change say that approach led banks to record losses too slowly after the 2008 financial crisis, leaving investors in the dark.
The new, upfront method—known as “CECL,” short for “current expected credit losses” and pronounced “Cecil”—is intended to make banks more transparent. But the new method also could require some banks to significantly boost their loan-loss reserves, which could cut into their earnings and regulatory capital.
Some banks say the rule will make them less able to make loans, which in a recession could make bad economic conditions worse. That’s because a bad economy would further boost projections for future loan losses, they say, causing the banks to further increase reserves and leaving them with less capital to lend.