The Monetary Basis of Bank Supervision
88 Pages Posted: 17 Jul 2019 Last revised: 20 Oct 2019
Date Written: October 17, 2019
Three statutes—the National Bank Act, the Federal Reserve Act, and the Federal Deposit Insurance Corporation Act—empower three government agencies—the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation—to supervise banks: to examine them and to tell them what to do, not just when they break bright-line rules, but whenever the agencies believe banks are engaged in “unsafe and unsound practices.” Despite the unusually broad scope of these provisions, academic treatments of them are quite shallow. This Article provides a new scholarly account of bank supervision, resurrecting the lost history of supervisory law and recovering the original meaning of safety and soundness. It argues that legislators gave government agencies the power to control various aspects of bank operations because they understood banks to be government instrumentalities augmenting the money supply on behalf of the state. And it shows that supervisors’ mandate—to prevent unsafe and unsound banking—is a monetary one. The standard authorizes officials to address practices that jeopardize the bank money system by undermining a bank’s ability to redeem its monetary liabilities (e.g., its notes and deposits) in base money (e.g., cash) on demand. In recent decades, scholars and practitioners have lost sight of this meaning, obscuring the monetary nature of bank liabilities and reducing safety and soundness to a vague platitude. Following the 2008 crisis the agencies revived their supervisory divisions. But continued confusion about the purpose of supervisory law and the legitimacy of intrusive government oversight of banks threatens to hamstring supervisors once again. Such backsliding calls into question the stability of our monetary architecture and the viability of the monetary settlement that first gave rise to supervisory law nearly two hundred years ago.
Keywords: Bank Supervision, Banking Law, Financial Institutions, Financial Regulation, Money, Monetary System
JEL Classification: E42, E44, E50, E58, G01, G18, G20, G21, G23, G28, N21, N22
Suggested Citation: Suggested Citation