Did the SEC impact banks' loan loss reserve policies and their informativeness?

During the late 1990s, the SEC alleged that banks were overstating loan loss allowances to establish cookie jar reserves. Their intervention in bank accounting culminated in 2001 with new guidance (SAB 102) designed to improve financial reporting quality. We show that banks' allowance estimation changed in response to the SEC's intervention. While allowance informativeness (as proxied by the ability to explain future losses) improved for Strong Banks, informativeness declined for Weak Banks whose incentives are to understate allowances. Our results help to explain why some (Weak) banks delayed loss recognition during the recent financial crisis. •We present evidence that banks changed their loan loss allowance estimation methods in response to the SEC's intervention.•Post-intervention, the allowances have a greater association with prior loss experience and a smaller association with non-performing loans.•While allowance informativeness improved for strong banks, it declined for the weak banks.•Our results help to explain why some (weak) banks delayed loss recognition during the recent financial crisis.