Discussion of “Did the SEC impact banks’ loan loss reserve policies and their informativeness?”

• Published in: Journal of accounting & economics Vol. 56; no. 2-3; pp. 66 - 78
• Main Authors: Ryan, Stephen G., Keeley, Jessica H.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 15.12.2013; Elsevier Sequoia S.A
• Subjects: Allowance for loan losses; Bank loans; Banks; Economic theory; Financial crisis; Financial services; Loan losses; Loan portfolio composition; Loss; Macroeconomics; Real estate; Regulation; Regulatory agencies; Securities and Exchange Commission; Staff accounting bulletins; Studies; U.S.A; United States > US; Securities and Exchange Commission; Banks; M41; Loan portfolio composition; G21; Allowance for loan losses
• ISSN: 0165-4101; 1879-1980
• DOI: 10.1016/j.jacceco.2013.10.006

Beck and Narayanamoorthy (this issue) argue and provide evidence that SEC pressure culminating in the issuance of SAB 102 in July 2001: (1) caused banks to record allowances for loan losses that were more associated with historical loan charge-offs and less associated with current non-accrual loans; (2) primarily affected large and strong banks; and (3) caused allowances for loan losses to be more (less) informative of future loan charge-offs for strong (weak) banks. We argue and provide evidence that the results the authors ascribe to SAB 102 are primarily explained by consumer loan charge-offs dominating banks’ loan charge-offs and, thus, allowances for loan losses in the post-SAB 102/pre-financial crisis period. This period coincided with a real estate and general macroeconomic boom in which other loan types experienced very low charge-offs.