Risk, Discretion, and Bank Supervision

50 Pages Posted: 17 Apr 2023

See all articles by Peter Conti-Brown

Peter Conti-Brown

University of Pennsylvania - The Wharton School; Brookings Institution

Sean Vanatta

University of Glasgow - School of Social and Political Sciences

Date Written: March 30, 2023


This article argues that bank supervision sits at the center of two foundational tensions in the governance of American finance. The first is the extent to which the financial system is controlled by public actors (i.e., the government) or private actors (i.e., the banks). The second is the extent to which the contest for that control occurs through bright-line rules or through 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. Risk management in that sense 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 to a variety of private actors, including the banks themselves. Supervision is the part of the government that is created and evolves, however imperfectly, to manage those relationships, those guarantees, and those commitments, each evolving in turn. The second tension, between rules and discretion in managing those commitments, represents the defining ethos of bank supervision. The process of supervision is therefore importantly distinct from the laws promulgated by Congress or the regulations written by the banking agencies themselves. Nor is bank supervision the verification of compliance with either laws or regulations, but is instead about the flexible use of discretion, within a system whose boundaries are defined by rules that are intentionally broad and vague. 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.

Keywords: bank supervision, rule of law, regulation, finance, financial stability, law & macroeconomics, financial history, political history, bank crises

JEL Classification: E00, E50, E58, K22, N00, N10, N11, N12, N20, N21, N22

Suggested Citation

Conti-Brown, Peter and Vanatta, Sean, Risk, Discretion, and Bank Supervision (March 30, 2023). Available at SSRN: https://ssrn.com/abstract=4405074 or http://dx.doi.org/10.2139/ssrn.4405074

Peter Conti-Brown (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Sean Vanatta

University of Glasgow - School of Social and Political Sciences ( email )

United Kingdom

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