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

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.