Post-Crisis Reform of the Supervisory System and High Reliability Theory
Georgia Law Review, Vol. 50, 2015
Georgia State University College of Law, Legal Studies Research Paper No. 2015-25
44 Pages Posted: 18 Aug 2015 Last revised: 10 Jan 2016
Date Written: August 14, 2015
This essay uses “high reliability organization” theory as a lens through which to view and analyze post-crisis reforms in banking supervision. Organizational sociologists have identified a class of organizations – referred to as high-reliability organizations (HROs) – that are able to maintain continuous performance across a wide range of dynamic and turbulent operating conditions. HROs distinguish themselves in their abilities (1) to anticipate problems and (2) where anticipation fails, to react to unexpected problems in a manner so as to ensure reliable performance. Although the HRO literature has focused on a wide range of organizational settings, its applications to financial institutions and regulation have not been studied.
Lawmakers and bank supervisors have not expressly framed their post-crisis reform initiatives in HRO terms, but they impliedly invoke HRO principles. For instance, when announcing its “new framework” for supervising the largest financial institutions, the Federal Reserve Board of Governors emphasized that the framework would be guided by two lodestars: institutional resilience through capital adequacy regulation and crisis containment through orderly liquidation authority (“OLA”). The regulatory theory underlying the new framework is two-fold. First, improved capital adequacy regulation will promote resilience by making institutions more robust to unexpected stresses. And second, new OLA will promote containment by ensuring that when institutional failures occur, their impact is isolated and continued functionality of the financial system is secured. Resilience and containment are hallmark HRO principles of reaction.
Although bank supervisors are obviously motivated by the HRO principles of reaction, they have been slower to embrace the HRO principles of anticipation. As such, post-crisis reform reflects at most an incomplete embrace of HRO principles. After all, HROs distinguish themselves not only through their ability to react to unexpected stresses, but also in their ability to anticipate and avoid future stresses. In the financial context, an effort to promote HRO principles of anticipation requires deep supervisory engagement with bank risk management departments and practices – an effort that supervisors have historically been hesitant to undertake. This Essay explores why supervisors have privileged principles of reaction over principles of anticipation. Ultimately, it concludes that such a response is driven more by the familiar dilemmas of regulatory capture and resource constraints than by reasoned administrative judgment.
Keywords: banking law, financial regulation, bank regulation, bank supervision, high reliability, reliability, resilience, risk management, stress testing, organizational sociology
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