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Bear Stearns' experience has challenged a number of assumptions relating to the supervision of large and complex securities firms, SEC Director Erik Sirri said in a testimony before the US Senate. An imperative is addressing explicitly how and by whom large investment banks should be regulated and supervised, and specifically whether the Commission should be given an explicit mandate to perform this function at the holding company level, along with the authority to require compliance.
“There is simply no provision under the statutory scheme that requires investment bank holding companies to compute capital measures and maintain liquidity on a consolidated basis”, Siri 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.”
Therefore, and in part because of the implications of the EUs Financial Conglomerates Directive, the SEC adopted its Consolidated Supervised Entities ("CSE") program for U.S. investment banks to fill a significant statutory gap. “The CSE program has been recognized as "equivalent" to that of other internationally recognized supervisors for purposes of the European Union's Financial Conglomerates Directive”, Siri said. “It is within this context that the SEC confronted the rapid deterioration of liquidity at Bear Stearns during the week of March 10th.”
The SEC is currently scrutinizing the liquidity of investment banks it supervises and discussing the banks' plans for raising new capital. It also discusses with CSEs the amount of excess secured funding capacity for less-liquid positions.
“Further, we are in the process of establishing additional scenarios, focused on shorter duration but more extreme events that entail a substantial loss of secured funding, that will be layered on top of the existing scenarios as a basis for sizing liquidity pool requirements”, Siri said.