Bowing to pressure from the Securities and Exchange Commission, SunTrust Banks Inc. is shaving its loan-loss reserves by $100 million, or 13%.

The move, announced Friday, stunned observers and set up a showdown between the SEC and banking regulators, which have been urging banks to prepare for a possible economic downturn.

The SEC had zeroed in on SunTrust's practices for loan-loss provisions as part of a broader crackdown on "earnings management" in banking and other industries.

The $60.7 billion-asset SunTrust, while staunchly defending its practices, agreed to trim the loan provisions it made in 1994, 1995, and 1996. Those cuts, in turn, produced an upward restatement of profits for the three years and reduced SunTrust's loan-loss reserves to $666 million from $766 million.

Analysts said the adjustments would have little effect on the performance of Atlanta-based SunTrust. But they roundly voiced alarm at the spectacle of a leading banking company being pushed to reduce its protection against loan losses at a time of economic uncertainty.

Sally Pope Davis of Goldman, Sachs & Co. called the situation a "travesty."

"This hurts the industry and I don't think it was necessary," she said. "This has important implications for the strength of balance sheets going forward as we go into the next economic cycle."

SunTrust, for its part, said it agreed to the restatements in order to win SEC approval of its pending acquisition of Crestar Financial Corp. It was that deal, valued at about $7.5 billion, that brought SunTrust's financial statements under SEC scrutiny.

"We thought we had been following the rules all along and still believe we have been and are," said John W. Spiegel, SunTrust's chief financial officer.

For the last several weeks, the SEC had been holding up the Crestar merger by refusing to sign off on proxy materials, which were needed for a shareholders' vote on the deal. SunTrust now plans to mail out the proxy to shareholders this week and hold a shareholders vote on the Crestar purchase Dec. 23.

The SEC, meanwhile, defended its views.

"If you're a well-managed company with a conservative portfolio, one with almost no bad loans, then you probably don't need as much in loan loss reserves," said Lynn E. Turner, the SEC's chief accountant.

"We clearly don't want to send the wrong message," he added. "We don't want all the banks reducing their reserves. Our message is we want people to make sure they've gone through a methodology that is consistent with the guidance out there."

Mr. Turner said the SEC currently is looking at the loan loss reserves of a handful of other banking companies. He would not name them.

Bank regulators mobilized swiftly after SunTrust's announcement. The Office of the Comptroller of the Currency and the Federal Reserve Board were expected late Friday to send the SEC a letter complaining of the agency's position on inflated loan loss reserves.

Though neither agency would release the letter, top regulators affirmed their positions in interviews.

"Going forward we believe extreme caution should be exercised in considering any regulatory action that would result in lowering reserves, except in cases where it is clear that inappropriate management of earnings had been the bank's primary objective in prior periods," said Julie L. Williams.

"Banks need strong capital positions and strong reserve positions," said Richard Spillenkothen, the Fed's director of banking supervision and regulation, who declined to comment directly on the SunTrust settlement.

Fed officials plan to meet with SEC staff shortly to discuss loan loss reserves, he said. "We are going to work with the SEC to communicate and work through these questions," he said.

Mr. Spiegel of SunTrust said many of the SEC's questions dealt with the difference between current losses and future losses and when reserves should be established.

Accounting guidelines on the matter "can be interpreted in a number of different ways," he said. The industry, banking regulators and the SEC need to come to an understanding of how to account for loan losses, he said.

"There are significant issues that are as yet unresolved," he said.

The restatement will cut $25 million from SunTrust's loan-loss provisions in 1994; $35 million from 1995 provisions; and $40 million from those in 1996. The move increases the company's after-tax net income for the three years by $61 million.

Despite the reduction in loan-loss reserves, the company says the level is still adequate.

At Sept. 30, SunTrust's reserve stood at 1.79% of its loan portfolio, in line with the current industry average of 1.82%, according to FDIC data. The company has long been known for conservative practices.

Nancy A. Bush, an analyst with Ryan, Beck & Co., said investors are upset with the SEC's actions.

"Everybody is concerned about the larger issue that the SEC is doing something that is completely counter to conservative practices in banks," she said. "It's insanity. The SEC can stick to its guns, but it's going to wreak havoc on what the regulators want to see in the banking industry."

For now, industry officials and accounting experts said, banks are trapped between the SEC and banking regulators.

"This is a lose-lose situation for the industry," said Keith Newton, a partner at the accounting firm Grant Thorton LLP. "On the one hand you have accounting rules that say you cannot recognize losses until they occur. But then you have regulators who are saying that times are not going to be as good so you need to start recognizing that in your loan losses. This is a catch 22."

"There is a direct conflict in the approaches of the SEC and the bank agencies," added Richard Whiting, general counsel at the Bankers Roundtable. "The SEC wants disclosure and the banking agencies want safety and soundness."

Donna J. Fisher, director of tax and accounting at the American Bankers Association, faulted the SEC for pursuing SunTrust without first issuing guidance on how banks may pad loan loss reserves without violating securities laws.

"Banks believe they are following the accounting rules," Ms. Fisher said. "If they are not, then we need some type of instruction of how to change our practices."

At meetings over the last few weeks, the topic has been debated by staff members from various regulatory bodies.

"The staffs of all the banking agencies and the SEC have been having some constructive discussions about this issue so we can try to make sure we're all working together on this instead of at cross purposes," said Stephen Katsanos, a spokesman for the FDIC.

Mr. Katsanos said regulators are pushing banks to be diligent in reserving for potential loan losses.

"All of the regulators have been encouraging banks to keep their underwriting standards high," he said. "Particularly now, in this economic cycle, everyone recognizes there could be problems with loans that need to be protected against. The reserves are one way to do that."

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