The uneasy truce between bank and securities regulators over loan-loss reserves has unraveled.
As expected, on Thursday the Securities and Exchange Commission said it expects banks to adjust their reserves to comply with an article issued April 12 by the Financial Accounting Standards Board.
"This guidance is part of generally accepted accounting principles and should be applied by all creditors," Lynn E. Turner, the SEC's chief accountant, wrote in a letter to the FASB.
The FASB article attempted to clarify several points of contention in existing loan-loss rules. It said that if a bank sets aside a reserve for a particular loan, it may not also include that loan when setting general reserves.
Equally important, the article said that banks may not set aside reserves for loans that might go bad. Reserves should only be set aside for probable losses that occurred as of the date of the financial statements, it said.
The SEC said banks may make a one-time adjustment in their financial statements to reflect any change in reserves, but the adjustment must be made in a bank's first fiscal quarter ending after May 20.
Comptroller of the Currency John D. Hawke Jr. said the new guidance could impel banks to tighten their accounting methodology for reserving, resulting in thinner cushions against bad times.
"Given the elevated levels of risk that we are seeing in the banking industry, it would be inappropriate for a government agency to take any action that would prompt banks to lower reserves," he said. "In fact, in some cases, we believe reserves should be higher."
Mr. Hawke also jabbed the SEC for invading the turf of bank regulators. "We are intimately familiar with the condition of banks we supervise," he said.
The SEC's announcement upsets a hard-fought agreement with bank regulators to jointly resolve conflicting viewpoints on loan-loss accounting over the next year. That agreement was announced in November, and reinforced in March by a joint statement from the two camps.
The rift began in earnest last fall, when the SEC delayed SunTrust Banks Inc.'s acquisition of Crestar Financial Corp. until it agreed to restate earnings from 1994 to 1996 and cut reserves by $100 million. Since then, many in the banking community have come to believe that the SEC is on a mission to have banks reduce their reserves.
The SEC strongly denies this.
In an interview, Mr. Turner said the SEC has "no view" on how many banks might have to adjust their reserves, or whether those reserves would go up or down. The agency simply wants to make sure that creditors reserve properly and in a manner that is transparent to investors, he said.
Though many banks' reserves have been scrutinized, no other bank has had to restate its earnings, Mr. Turner said.
"People have focused on the SunTrust thing and then think everyone is overstating their reserves ... in fact, many have done a very nice job," he said.
But David Gibbons, deputy comptroller for credit risk at the OCC, said everyone is better off when banks have higher reserves.
"The reserves are there to protect the system from losses that are inherent in the portfolio today," he said. "It'd be counterproductive to the interests of taxpayers, shareholders, and the financial services sector" if banks cut reserves simply to conform to accounting technicalities.
Bank regulators may not be of a single mind on the issue.
On Thursday, the Federal Reserve Board was reportedly pressing other bank regulators to sign a statement saying the FASB's article was largely consistent with current accounting practices. The Fed was apparently so confident that the statement would be signed by regulators and released, that its deputy associate director for banking supervision announced it Thursday at the FASB's public meeting at its headquarters in Norwalk, Conn. As of late Thursday, no such statement had been issued.