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The fact that the SEC has no explicit statutory mandate to supervise the nation's investment banks on a consolidated basis should not be tolerated indefinitely, SEC Chairman Cox said. Voluntary consolidated oversight is no longer enough. An appropriate regime should be established “very soon”.
The framework of federal financial services regulation is dangerously behind the times, he warned. “Currently, there is simply no provision under the statutory scheme that requires investment bank holding companies to compute capital measures or to maintain liquidity on a consolidated basis”, Cox said. “Nor does the law provide for a consolidated supervisor that is knowledgeable in their core securities business, and that would be recognized for this purpose by international regulators.”
Reminding of the Bear Stearns case, Cox noted that the prevailing measurements of capital and liquidity were inadequate to prevent or predict the "run on the bank". Neither the regulatory approach on Consolidated Supervised Entities, nor any existing regulatory model had taken into account the possibility that secured funding, even if it were over-collateralized with U.S. Treasury or agency securities, might disappear in a crisis of confidence, he said.
“The notion that investment banks should be able to operate outside of a statutory consolidated supervision regime is no longer tenable in the wake of Bear Stearns”, he warned. “It is impossible for anyone to say that in this case, “the system worked.”
Cox underlined that the SEC should be given the express authority and a regime appropriately tailored to securities firms to supervise the nation's investment banks on a consolidated basis.