Paulson and Cox on Regulation of Investment Banks

Treasury Secretary Henry Paulson is expected to call for greater oversight by the Federal Reserve over investment banks in a speech today, including explicit authority to intervene whenever an investment firm poses risks to the system.  WPost, Paulson To Urge New Fed Powers. The SEC's Chairman Cox, in an opinion piece in today's Wall St. Journal, sets forth the argument he has made recently in testimony and speeches about the differences in regulation of commercial and investment banks.  While the SEC has, through its voluntary Consolidated Supervised Entities Program, exercised oversight over the four (previously five, until Bear's collapse) major investment firms not regulated by the Fed, the SEC's focus is on capital and liquidity requirements to protect the customers of the broker-dealer from failure.  The net capital rules proved inadequate to prevent the "run on the bank" loss of confidence that caused Bear's demise.  He notes that the Fed's intervention through emergency borrowing raises the moral hazard issue that others have raised.  Finally, he calls for explicit statutory recognition of the SEC's CSE program.  WSJ, A Brave New World for Financial Regulation.  This is an important debate in which Congress needs to engage.  It seems clear that there is a need for new tools and a shared role between the Federal Reserve and the SEC.