SEC Vows to Consult Agencies Before Acting on Loss Reserves

Securities regulators vowed Monday to consult with a bank's regulator before challenging its loan-loss reserves.

The announcement, part of a two-page agreement, represented regulators' third attempt in nine months to establish common ground on the controversial issue.

It also marked a victory for banks, which have worried about the Securities and Exchange Commission's intentions since the agency forced SunTrust Banks Inc. to restate its reserves in November.

"It's good that they will consult with them in advance," said Donna A. Fisher, director of tax and accounting at the American Bankers Association. Bank regulators often are aware of bank-specific circumstances that the SEC "might not have focused on," she said.

"It's certainly got to be a relief for the banking industry," said Lawrence Cohn, a bank analyst with Ryan Beck & Co. "The industry was operating in a greatly uncertain environment, being told one thing by their regulators and one by the SEC ... This is clearly very positive news."

Under the agreement, the SEC pledged to confer with its banking counterparts before taking "significant action" against a bank. Though "significant action" is not defined in the release, bank and securities regulators said it refers to an order to restate reserves and ultimately earnings.

The agreement broke no other new ground. Its six bullet points repeat issues hammered out in earlier accords or guidelines issued by the Federal Reserve Board in May. However, Craig A. Dabroski, an accounting specialist at America's Community Bankers, lauded regulators for a "great attempt" at clarifying both turf and rules.

SEC officials called the agreement an important accomplishment, but downplayed the significance of its vow.

"This statement, and this ongoing process, is a victory for coordination and indicative of good government at work," an agency spokesman said. But "any time we've thought a restatement might be necessary, we've consulted with the banking regulators, kept them apprised, and sought their input.

"This is the existing practice," he added.

But banking industry sources disagreed.

"I think the SEC is sorry they ever got involved," said one source, citing the "public whipping" that general counsel Harvey J. Goldschmid received at a House subcommittee's June 16 hearing on the loan-loss dispute.

Though the SEC's promise to consult with bank regulators appears to be a step forward, regulators said it will not protect banks against future questions about the size of their reserves.

In the case of a disagreement over whether to force a bank to restate its earnings, for example, the SEC would still trump.

"At the end of the day, they (the SEC) have a mandate," said Christie A. Sciacca, associate director for supervision policy at the Federal Deposit Insurance Corp. "We don't have veto power."

"The SEC is the final arbiter on those reports," said another bank regulator.

Bank and securities regulators began tussling over the reserves issue last fall, when the SEC held up SunTrust's acquisition of Crestar Financial Corp. until SunTrust agreed to cut reserves by $100 million and restate three years' of earnings.

Interagency agreements reached in November and March seemed to promise an end to the bickering. But the alliance began to unravel in April when the Financial Accounting Standards Board issued on article on loan-loss reserves. It disintegrated further in May when the SEC instructed banks to comply with the article and, if necessary, make one-time adjustments in loan-loss allowances.

Bank and thrift regulators accused the FASB and the SEC of sowing confusion and sending a signal, inadvertently or not, that banks should lower their reserves or face SEC scrutiny.

Bank and securities regulators have been trying to get back in sync ever since, but agency sources say they repeatedly tripped over the issue of consultation. In short, the SEC was willing to notify bank regulators before taking action against a bank, but did not want to bank regulators to actually share in the decision-making.

The SEC's pledge to consult with regulators is nearly identical to an amendment offered by Rep. Marge Roukema, R-N.J., to financial modernization legislation.

"I commend the SEC for taking this action," she said. But Rep. Roukema said she would continue to support the amendment, because the SEC's voluntary pledge needs to be made mandatory.

Congressional interest in the turf dispute acted as a catalyst for agreement.

"It certainly got our attention," said Mr. Sciacca.

So far, concern that banks might reflexively lower their reserves in order to comply with the FASB's April article-and to avoid an SEC inquiry- appear unfounded. According to bank regulators, few if any banks have said they will adjust their reserves.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER