Did the SEC Impact Banks’ Loan Loss Reserve Policies and Their Informativeness?

51 Pages Posted: 4 Aug 2011 Last revised: 12 Jul 2013

See all articles by Paul J. Beck

Paul J. Beck

University of Illinois at Urbana-Champaign - Department of Accountancy

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation

Date Written: March 3, 2012

Abstract

During the late 1990’s, the SEC alleged that banks were overstating their loan loss allowances to establish cookie jar reserves and issued new guidance on allowance estimation designed to improve financial reporting quality. We show that banks’ estimation methods changed in response to the guidance and the changes significantly affected the informativeness of the allowances as proxied by their ability to explain future losses. While the SEC’s guidance has improved the informativeness of allowances for strong banks, it has had the opposite effect on 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.

Keywords: Loan Loss Allowances, Provisions, Bank Accounting, Smoothing, SEC, Regulatory Intervention

JEL Classification: G14, G21, M41

Suggested Citation

Beck, Paul J. and Narayanamoorthy, Ganapathi S., Did the SEC Impact Banks’ Loan Loss Reserve Policies and Their Informativeness? (March 3, 2012). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1904441 or http://dx.doi.org/10.2139/ssrn.1904441

Paul J. Beck

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
293 Commerce West
Champaign, IL 61820
United States
217-333-4563 (Phone)
217-244-3118 (Fax)

Ganapathi S. Narayanamoorthy (Contact Author)

Tulane University - Accounting & Taxation ( email )

United States

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