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

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  • Beck, Paul J.
  • Narayanamoorthy, Ganapathi S.

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.

Suggested Citation

  • Beck, Paul J. & Narayanamoorthy, Ganapathi S., 2013. "Did the SEC impact banks' loan loss reserve policies and their informativeness?," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 42-65.
    • Handle: RePEc:eee:jaecon:v:56:y:2013:i:2:p:42-65
    DOI: 10.1016/j.jacceco.2013.06.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Loan loss allowances; Provisions; Bank accounting; Smoothing; SEC; Regulatory intervention;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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