Federal banking regulators are urging the Securities and Exchange Commission to temper its campaign against high loan-loss reserves.
In an unusual joint letter, the Office of the Comptroller of the Currency and the Federal Reserve Board said the SEC should use "extreme caution" before forcing banks to reduce these reserves.
"We are concerned ... about the commission's current moves against what it perceives as 'excess' reserves at some banks," the agencies said in a Nov. 13 letter.
The letter arose from the SEC's spat with SunTrust Banks Inc. The agency charged the $60.7 billion-asset bank used reserves to manage earnings, rather than to account for loan losses.
SunTrust had staunchly defended its reserve policy, but on Friday agreed to SEC demands that it cut reserves by $100 million, or 13%, and restate earnings for the past three years. Analysts said the bank had to settle so it could close its acquisition of Crestar Financial Corp. by yearend.
An SEC spokesman said Monday that the agency will respond to the letter, but declined to comment further.
The OCC and Fed said in the letter that they are worried that banks may not be stockpiling enough loan-loss reserves. "Bank regulators, both domestically and abroad, presently are questioning the adequacy of loan- loss provisions and reserves in view of deterioration in world markets," the agencies said.
Bankers have always had trouble estimating the amount of reserves necessary to protect an institution during an economic downturn, the agencies said. As a result, bankers need broad discretion to maintain high reserves, they said.
The SEC should act against a bank only when management of earnings-and not safety and soundness-is the primary reason for large loan-loss reserves, the OCC and Fed said.
The agencies also offered to discuss the issue directly with SEC Chairman Arthur Levitt Jr. The letter was signed by Fed Governor Laurence H. Meyer and acting Comptroller of the Currency Julie L. Williams. "It is critical that banking and securities regulators be consistent on this issue," they wrote.
Paul A. Schosberg, president of America's Community Bankers, commended the banking agencies for standing up to the SEC. "In the jargon of regulatory agencies, this letter was pretty strong," he said. "It very clearly and precisely makes the case for a presumption that the bank executives know what they are doing when establishing levels of reserves."
Karen M. Thomas, director of regulatory affairs at the Independent Bankers Association of America, said the banking agencies needed to act because the SEC's position does not make sense.