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

Paul J. Beck and Ganapathi S. Narayanamoorthy

Journal of Accounting and Economics, 2013, vol. 56, issue 2, 42-65

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.

Keywords: Loan loss allowances; Provisions; Bank accounting; Smoothing; SEC; Regulatory intervention (search for similar items in EconPapers)
JEL-codes: G14 G21 M41 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:56:y:2013:i:2:p:42-65

DOI: 10.1016/j.jacceco.2013.06.002

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