This post is part of Notice & Comment’s symposium on Peter Conti-Brown and Sean Vanatta’s Private Finance, Public Power: A History of Bank Supervision in America. For other posts in the series, click here.

Reading Peter Conti-Brown and Sean Vanatta’s rich history of banking supervision in the U.S., I was prompted to ask myself whether there is a meta-account of supervision that would fit all rich liberal democracies, or even all states, with local variants reflecting specifically local conditions. At an abstract level, this would be in the spirit of pragmatic genealogy, comprising a stylized general story of functional purpose that gets cashed out in national or regional stories that reflect locally salient focal points.[1]  I think there is such a stylized story, but one that throws up intriguing questions when applied to the U.S. 

In terms of political economy, private banking institutions deliver two things. They largely take the state out of the allocation of credit to households and firms, and they leave society with incipient financial instability. The two are linked, and so in combination represent a profound public choice. Only institutions whose liabilities are widely accepted as money can offer on-demand payments accounts and lines of credit, but such institutions are unstable if people come to believe that their monetary liabilities are not safe after all.[2] So, if private institutions (banks) are in the business of offering liquidity-insurance to the rest of us, a state entity gets summoned into existence as their liquidity reinsurer, otherwise known today as the central bank. Of course, the sequence can be the other way around, with the creation of a money-issuing state bank spawning private banks that it insures, but the overall point about institutional equilibrium stands. 

These central banks are routinely exposed to the private banks defaulting, which is a problem not only for public welfare but narrowly for the central banks too if they end up suffering losses. Bank supervision has its functional origins in guarding central banks against counterparty credit risk, and against the moral hazard problems implicit in their provision of liquidity reinsurance. 

That story is close to being literally true in Britain, the creation of whose central bank kicked off the 18th century commercial revolution and much that followed.[3] The Bank’s oversight of banks had little or no statutory backing until the final decades of the 20th century, with what we would now call regulation being a legally uncodified set of policies that guided and constrained supervisory discretion (the exercise of which could have been subject to judicial review). Formal regulation, exercised under delegating primary legislation, grew out of that.

I assert that things were not so very different elsewhere. Of course, codification occurred earlier in civil-law jurisdictions but the underlying drivers — the lender of last resort’s social and private hazards — were congruent.[4] Except that is, perhaps, in the U.S. where, as Private Finance, Public Power lays out in fascinating detail, the order of the day was a succession of express statutes to regulate banking, for much of the 19th century without anything recognisable as a central bank in the shadows, the Federal Reserve being created only in 1913 after one crisis too many.

Indeed, one’s first thought once the history is laid out is that the American path is less about public welfare or the risks to the body politic in pursuing public welfare, and more about factional power. At the beginning, there are factional struggles about whether to permit a federal bank at all. At the end, there is a forever-struggle over whether multiple banking regulators and supervisors are warranted in order to fragment power and authority within the federal government, and between the federal government and the states, or whether some consolidation or at least simplification would be useful — but useful to whom? Typically absent from the debates — not in the book — is any maintained sense of why government is involved in supervising banking at all. One is reminded that the same political system uses government-backed enterprises to subsidise mortgage credit, and so drive-up house prices, in what is supposedly the most liberalised economy in the rich world. 

Looking back to my own decades-long involvement with multiple U.S. banking and other financial agencies, their deep disregard for each other starts to make sense: if there is historical fuzziness about purpose, it is hardly surprising to find inter-agency struggle (often worst, by the way, among nominated and confirmed officials). But my background story does, I think, function as a kind of gravitational force, pulling officials, wherever they happen to sit, back towards a purpose that is hard to shake off whatever the structure or factional origins of the law. This is most obvious, because the elemental issues are most salient, after a banking crisis of some kind, and the U.S. has had many — often completely avoidable ones as most recently in 2023 when a bunch of large regional banks failed. Then, but never for long enough, voices call for more skillful supervision of banking. After all, regulatory codes can never keep up with a shape-shifting industry: forensic analysis and skills are needed, not only the monitoring of compliance with rules and enforcement for breaches. The big questions about the industry are always, is this bank sound, and if not, could it be turned around, or resolved in an orderly way and without cost to taxpayers?

Meanwhile, the big questions about the authorities are whether the supervisory functions should be under day-to-day political control, and whether any nation, even the U.S., has autonomy in this field. My answer to the first is that stability-oriented functions belong at arm’s length from quotidian politics, but under terms and constraints set by the legislature.[5] My answer to the second is: No, all the major financial centers are interdependent, and that has been unavoidably so since capital controls were dismantled after the demise of Bretton Woods in the early-1970s. The great change came, therefore, not when the authors say, with 1979 and governments dedicated to neoliberalism, but rather half a decade earlier when, after a crisis had jumped across the Atlantic Ocean, the Basel committee on banking supervision was established.[6]

To conclude on a somber note, a vital feature of the authors’ subject is that, in a slogan I have used before, no one cares about stability until they cry for help. Conti-Brown and Vanatta have done everyone, most of all their compatriots, a service in reminding us that banking supervision is a thing, and that the U.S. public does depend upon it.

Paul Tucker is a research fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government, the author of Unelected Power (PUP, 2018) and Global Discord (PUP, 2022), and was a central banker, regulator, supervisor, and international standard setter from 1980 to 2013.

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[1] Queloz, M. (2021). The Practical Origins of Ideas: Genealogy as Conceptual Reverse-Engineering. Oxford University Press.

[2] Holmstrom, Bengt. “Understanding the Role of Debt in the Financial System.” BIS Working Paper No. 479, 2015.

[3] North, Douglas C. and Barry R. Weingast. “Constitutionalism and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England.” Journal of Economic History, Vol. 49, No. 4, 1989: 803-832.

[4] Giannini, Curzio. The Age of Central Banks. Cheltenham and Northampton, MA: Edward Elgar, 2011.

[5] Tucker, Unelected Power (PUP, 2018), chapters 19-21.

[6] Tucker, Global Discord (PUP, 2022), chapter 19.