Risk, Discretion, and Bank Supervision

This Article argues that an old but overlooked form of governmental oversight—bank supervision—sits at the center of two foundational tensions in the governance of the American economy. The first is the extent to which the financial system is controlled by public actors (i.e., the government) versus private actors (e.g., the banks). The second is the extent to which the contest for that control is regulated by bright-line rules versus by the exercise of regulatory discretion. On the first tension, this Article argues that supervision is the public and private participation in financial risk management, such that public actors cannot relinquish control of residual risk while private actors do not relinquish control of frontline risk management. In this sense, risk management is shared, but not shared equally: bank supervisors represent a government that has essentially guaranteed the resilience of the financial system through formal and informal commitments. Supervision is the part of the government that is created and evolves— however imperfectly—to manage those relationships, guarantees, and commitments. The second tension, between rules and discretion in managing those commitments, represents the defining ethos of bank supervision. The process of supervision is not simply the verification of compliance with laws promulgated by Congress; rather, it is a flexible use of discretion within a system whose boundaries are defined by rules that are intentionally broad and vague. This last point is of profound importance in the post-Chevron era: as regulations receive less deference in courts, supervisory assessments will likely expand in importance even further. Using the rich history of supervision in the United States from the antebellum period to the present, this Article presents a theoretical conception of supervision as the space where bankers and the government engage each other in sometimes cooperative, sometimes contentious disputes with substantial influence on the direction of financial and economic policy. This conception of bank supervision makes important contributions to our understanding of issues of importance to banking, such as climate change finance and deposit insurance, but also has important implications for administrative law, constitutional law, and the evolution of state capacity in the United States in the long 20th century.