Republican senators on Thursday bashed Securities and Exchange Commission Chairman Arthur Levitt for demanding that banks lower their loan-loss reserves.
"While the SEC has publicly stated that they are not trying to require reductions in loan-loss reserves, the implication still exists that they are," said Sen. Rod Grams, chairman of Senate Banking's securities subcommittee. "This mixed signal is confusing to regulators, auditors, and bankers and is simply unacceptable."
Mr. Levitt, the lone witness at a lightly attended subcommittee hearing, defended the SEC's need to protect investors from misleading accounting practices and argued that the agency's actions have been misconstrued.
"The SEC does not want, nor has it ever wanted, financial institutions to artificially lower loan-loss allowances or ever have inadequate allowances," he said. "The banking regulators agree that there is no reason why a financial institution can't have a prudent estimate of loan losses while, at the same time, reflecting management's judgment on the quality of that portfolio to the marketplace."
Mr. Levitt emphasized that the SEC and banking agencies have forged "a strong consensus" on the loan-loss reserves controversy. An agreement reached two weeks ago indicates that the SEC will consult with a bank's supervisor before taking "significant action," such as ordering a bank to restate its reserves or earnings.
"It is very important that there be no doubt whatsoever as to our commitment to confer when appropriate with ... the banking agencies," Mr. Levitt said. "That commitment is and will be absolute."
Mr. Levitt refused to be pinned down on details of the agreement.
When asked to define the word "consult," Mr. Levitt said the SEC would discuss issues that "rise to a significant nature" with the bank's primary regulator and other regulators. In written remarks, he opposed legislation that would mandate interagency cooperation, saying it would require time- consuming consultation on small matters.
When pressed on whether the banking agencies would have to approve before the SEC disciplines banks, Mr. Levitt said only that regulators would work in a "collegial and constructive" way.
Industry observers called Mr. Levitt's remarks encouraging but said the agreement still must be tested. "It sounds like the issue is put to rest- for now," said Donna J. Fisher, director of tax and accounting for the American Bankers Association.
The dispute began last fall when the SEC held up SunTrust Banks Inc.'s acquisition of Crestar Financial Corp. until SunTrust agreed to cut reserves by $100 million and restate three years of earnings.
Sens. Grams and Richard C. Shelby, R-Ala., criticized Mr. Levitt's handling of the SunTrust case and the SEC's investigation of the former Bankers Trust Corp. Mr. Levitt declined to discuss any specific cases publicly but said SunTrust is "a great institution."
