SEC's Director of Trading & Markets Division Testifies on Risk Managment at Investment Banks

Erik Sirri, Director, Division of Trading and Markets, SEC, testified on Oversight of Risk Management at Investment Banks before the Senate Subcommittee on Securities, Insurance, and Investment Committee on Banking, Housing, and Urban Affairs on June 19.  Here is his conclusion:

The CSE [Consolidated Supervised Entity] program adopted by the Commission has served to fill a gap left after the Gramm-Leach-Bliley Act broadly restructured the regulation of financial institutions. Although supervised on an elective basis by the Commission under the CSE program, and in compliance with capital standards at the holding company and regulated entity level, Bear Stearns ultimately was overwhelmed by the unprecedented demands for liquidity it faced in a crisis of confidence. As detailed above, the Commission has taken the lessons learned from the Bear Stearns events to improve the supervision of the remaining investment banks and to enhance existing relationships with other supervisors to address the issues that these and other financial institutions are experiencing in the current turbulent market conditions.

An imperative from the Bear Stearns crisis is addressing explicitly through legislation 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. Chairman Cox has called for such an explicit mandate, together with a dedicated funding stream for the CSE program. These steps are intended to ensure that the supervisory regime for investment banks is adequate in light of evolving market conditions and builds on a long history of Commission involvement in the supervision of securities firms.