Investment banks need different regulatory oversight than commercial banks, and the U.S. Securities and Exchange Commission should be given the authority to supervise the broker-dealer firms, SEC Chairman Christopher Cox said on Thursday.
Currently the SEC is the primary supervisor of the country's four largest investment banks -- Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley. But that supervision is voluntary and Cox has been urging Congress to give it or another agency legal authority to oversee the banks.
"I believe Congress and regulators must recognize that different regulatory structures are needed for oversight of these industries," Cox said in prepared remarks to be delivered to a Congressional panel.
"Put simply, regulatory reform should not and need not, amount to the elimination of the investment banking business model.
Urgent regulatory reform has been underway since the Federal Reserve rescued Bear Stearns in March and opened its discount window to other investment banks out of concern that a failure could tear apart the weakened financial system.
Earlier in July, the SEC and the Fed formalized an agreement to share information about the investment banks and commercial banks, which are overseen by a number of federal regulators including the Fed.
The agreement was something of a stop-gap measure to tide authorities over until new regulations can be debated and passed by Congress.
Cox, outlined for the first time how the securities firms should be regulated and said the SEC should be given the authority to set standards for capital, liquidity, risk management, internal controls, record keeping and reporting.
Cox told Congress that it should also give the agency the authority to "apply progressively more significant restrictions on operations if capital or liquidity adequacy fails, including requiring divestiture of lines of business."
The SEC should also be given the authority to enforce the rules and share information with other regulators, he said.
Emergency action by the Fed in March to stem a financial market panic over U.S. subprime mortgage losses marked the first time since the Great Depression that the U.S. central bank had risked taxpayers' money by allowing investment banks access to its lender-of-last resort liquidity facilities.
Since then, Fed officials have argued that they need more oversight of investment banks if they going to be obliged by circumstances to lend them money again in the future.
Testifying at a House Financial Services Committee hearing to examine the future of financial regulation, Cox said the SEC should be given the authority to act if investment banks fail.
"No one today has sufficient authority to take effective action if a major financial enterprise experiences rapid financial deterioration," he said.
Cox warned against imposing the existing commercial bank regulatory regime on investment banks as their business, accounting and regulatory framework are different.
"It is conceivable that Congress could create a framework for investment banking that would intentionally discourage risk taking, reduce leverage, and restrict lines of business," Cox said.
"But this would fundamentally alter the role that investment banks play in the capital formation that has fueled economic growth and innovation domestically and abroad," he said.
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