Subject The article examines the correlation between the bank's interest policy and the formation of loan loss reserves in the context of ensuring the financial stability of the credit institution. Objectives The article aims to analyze the interest rate policy of banks and loan loss provisions formation, identify problems in this area, and develop a model of provision formation that meets the requirements on the banking sector stability in a better way. Methods For the study, I used the systems approach, methods of comparative and quantitative statistical analyses, and expert appraisal techniques. Results The article proposes certain measures to improve the interest rate policy of banks and a model of loan loss provisions formation, which will allow to overcome the procyclical nature of provisions formation and contribute to the maintenance of banking sector sustainability. Conclusions and Relevance The significant problem of ensuring the financial stability of the banking sector is the lack of direct connection between the high risk premium and the formation of a real source of loan repayment. The research results are expedient to use for the improvement of banking regulation.