Federal Reserve Governor Laurence H. Meyer waded into the controversy over accounting for loan-loss reserves Thursday, portraying the central bank as the debate's honest broker.
The Fed split with the other three banking and thrift agencies last month when it backed a move by securities and accounting regulators to crack down on bank loan-loss reserving.
The Securities and Exchange Commission and the Financial Accounting Standards Board said they were simply clarifying existing policy by barring banks from reserving against a specific loan and then including it when setting general reserves.
The move caught many bankers by surprise because banking and securities regulators had pledged in March to tackle thorny loan-loss reserve issues together. New accounting rules are expected next spring to detail for banks how to document and disclose probable loan losses.
During a speech to the Conference of State Bank Supervisors in Williamsburg, Va., Mr. Meyer insisted the disagreement is being overblown.
"Last week press reports characterized the Fed's position as being different from that of other federal banking agencies. That is not true," he said.
But just moments later he explained the Fed's position and added: "The other banking agencies appear less sanguine about the intent of the FASB guidance and have registered protests on Capitol Hill." Politics aside, Mr. Meyer did tell bank managers to "feel free to maintain reserves at the high end of a reasonable range."
The SEC began its investigation of loan-loss reserves last year and forced SunTrust Banks Inc. to revise its 1996-98 earnings upward after cutting reserves by $100 million.
Mr. Meyer also warned the state regulators that the Fed is "beginning to see slippage in important indicators of industry strength."
Though still low by historical standards, he noted that the volume of nonperforming assets grew last year for the first time since 1991.
Agricultural loan deliquencies are also rising, he said. "Continued weakness in much of this sector could begin to weigh on some community banks," he said.
Mr. Meyer devoted the bulk of his speech to the new capital standards proposed Thursday by the Basel Committee for Banking Supervision. (See related story page 1.)
"Far more needs to be done in measuring and managing credit risk," Mr. Meyer said. "It is and should be the highest priority for the industry and the supervisors."