HIGHLIGHTS: Fed's Geithner, SEC's Cox testimony to House panel

WASHINGTON (Reuters) - Federal Reserve Bank of New York President Timothy Geithner and Securities and Exchange Commission Chairman Christopher Cox testified on financial regulation on Thursday before the House Financial Services Committee.

Following are highlights from their testimony:

GEITHNER ON FINANCIAL MARKET LIQUIDITY (from Q&A)

"My sense is that these facilities, all of them, are still providing a very important role in confidence as a backstop to liquidity in extremis. And I don't think you can really judge the value today to the firms themselves, and the people that fund them, from looking at use day by day."

"Even though use has declined progressively over time, just to underscore one important point, we've been very careful from the beginning, along with the SEC, to try make sure while these facilities are in place, the major investment banks move to adopt a more conservative mix of leverage and funding than they had on the eve of the Bear Sterns thing. ... They have made considerable progress in moving toward an appropriate and more conservative mix."

COX ON INVESTMENT BANK SUPERVISION (prepared text)

"The commission should be given a statutory mandate to perform this function at the holding company level, along with the authority to require compliance. In addition, legislation should prescribe explicitly how the resolution of financial difficulties at investment bank holding companies will be organized and funded."

"The mandatory consolidated supervision regime for investment banks should provide the SEC with several specific authorities. Broadly, these include authority, with respect to the holding company, to: set capital and liquidity standards; set record-keeping and reporting standards; set risk management and internal control standards; apply progressively more significant restrictions on operations if capital or liquidity adequacy falls, including requiring divestiture of lines of business; conduct examinations and generally enforce the rules; and share information with other regulators."

GEITHNER ON FINANCIAL FIRM OVERSIGHT (prepared text)

"The Fed, as the financial system's lender of last resort, should play an important role in the consolidated supervision of those institutions that have access to central bank liquidity and play a critical role in market functioning. Our ability to directly oversee the risk profile of these institutions is essential to our capacity to make the judgments necessary for using our lender of last resort tools, including critical judgments about liquidity and solvency for individual institutions and for the system as a whole. Those judgments require the knowledge that can only come from a direct, established role in supervision. And replacing our ongoing role as consolidated supervisor with stand-by, contingent authority to intervene would risk exacerbating moral hazard and adding to uncertainty about the rules of the game."

GEITHNER ON CONSOLIDATED SUPERVISION (prepared text)

"Simplifying and consolidating the regulatory architecture will be instrumental to these efforts by establishing a common framework of rules, clear responsibility and authority, and by reducing opportunities for arbitrage. Through close coordination across central banks, supervisors, and market regulators, we need to adopt an integrated approach to the design and enforcement of capital standards and other prudential regulations critical to systemic stability. In this context, prudential supervisors, working with those responsible for setting accounting standards and capital market regulations, need to systematically examine the interaction among capital, accounting, tax, and disclosure requirements to assess their effects on the overall levels of leverage and risk across the financial system."

COX ON INVESTMENT/COMMERCIAL BANK BUSINESS (prepared text)

"Rather than extend the current approach of commercial bank regulation to investment banks, I believe Congress and regulators must recognize that different regulatory structures are needed for oversight of these industries. Put simply, regulatory reform should not, and need not, amount to the elimination of the investment banking business model."

COX ON WINDING DOWN INVESTMENT BANKS (prepared text)

"No one today has sufficient authority to take effective action if a major financial enterprise experiences rapid financial deterioration. In the statute, the SEC should be given explicit authority to do this for all investment bank holding companies in the statute. It is exceptionally important in crafting any future framework for resolution that provisions be carefully drafted to avoid precipitating anticipatory movement of business or breaches of OTC derivatives contracts before any intervention occurs."