Under pressure from lawmakers to cooperate, federal banking and securities regulators reached a deal Wednesday that should head off future disputes over excessive loan loss reserves.
As part of the agreement, the Securities and Exchange Commission said it would not require a bank to restate earnings, even if it believes the institution has inflated reserves or failed to adequately document the size of the fund.
Instead, the agencies said they would work with banks to improve disclosure and documentation of loan loss reserves. Banks also could be required to cut reserves in future years.
"This is a joint recognition that the best way to address any problem is to do it prospectively," said Kevin Bailey, deputy comptroller for core policy at the Office of the Comptroller of the Currency.
The SEC began cracking down on earnings management last fall. This included delaying SunTrust Banks Inc.'s acquisition of Crestar Financial Corp. until the company agreed to reduce loan loss reserves by $100 million and restate earnings.
The SunTrust case outraged the industry, which charged that it was unfair for the SEC to punish a bank for holding excessive reserves at the same time banking regulators were urging them to bolster reserves.
Regulators issued a joint statement in November vowing to work more closely on loan loss provisioning, but industry officials continued to complain about a lack of coordination.
The new agreement, however, won rave reviews. "This is a very impressive move," said Donna Fisher, director of tax and accounting at the American Bankers Association. "This appears to be a commitment that the SEC and agencies will work together with input from the industry."
Rep. Marge Roukema, chairwoman of the House Banking Committee's financial institutions subcommittee, said the deal should stop the turf wars between the SEC and banking agencies. "The regulated should not be told one thing by one regulator and then told something different by another regulator," the New Jersey Republican said.
Rep. Roukema was one of several lawmakers who had promised to introduce amendments to the financial reform bill to end the controversy over loan loss reserves. She dropped the amendment, however, after regulators announced the deal.
The agreement, which was reached late Wednesday afternoon, also commits the SEC, OCC, Federal Reserve Board, Federal Deposit Insurance Corp., and Office of Thrift Supervision to establishing a joint working group on accounting issues. This group will issue guidelines on how banks should make "reasoned assessments of losses" in their portfolios and how they should documents these expected losses, according to the agreement.
They said the group will consult frequently with the industry and urged the American Institute of Certified Public Accountants to develop more specific guidance on loan loss provisioning.