Did the SEC impact banks' loan loss reserve policies and their informativeness?

Paul J. Beck, Ganapathi S. Narayanamoorthy

Research output: Contribution to journalArticlepeer-review

Abstract

During the late 1990s, the SEC alleged that banks were overstating loan loss allowances to establish cookie jar reserves. Their intervention in bank accounting culminated in 2001 with new guidance (SAB 102) designed to improve financial reporting quality. We show that banks' allowance estimation changed in response to the SEC's intervention. While allowance informativeness (as proxied by the ability to explain future losses) improved for Strong Banks, informativeness declined for Weak Banks whose incentives are to understate allowances. Our results help to explain why some (Weak) banks delayed loss recognition during the recent financial crisis.

Original languageEnglish (US)
Pages (from-to)42-65
Number of pages24
JournalJournal of Accounting and Economics
Volume56
Issue number2-3
DOIs
StatePublished - Nov 2 2012

Keywords

  • Bank accounting
  • Loan loss allowances
  • Provisions
  • Regulatory intervention
  • SEC
  • Smoothing

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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