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.

Peter Conti-Brown’s and Sean Vanatta’s excellent history of bank supervision, Private Finance, Public Power, arrives at a crucial moment. Supervisory discretion is facing an unprecedented assault from conservative legal activists and banks claiming supervisory overreach. The industry’s top priority in Trump 2.0 is clear: eliminate supervisors’ discretion to evaluate bank management.

Private Finance, Public Power helps reveal why doing so would be a grave mistake.

A bit of background: Modern bank supervision operates primarily through the CAMELS rating framework.[1] During annual examinations, supervisors score banks on their Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. Banks that score well enjoy privileges like less frequent exams and expedited merger approvals. Poorly rated firms may be subject to growth restrictions or limits on dividends.

While banks have long criticized the CAMELS framework for giving supervisors too much discretion, they harbor particular disdain for the Management rating. Banks contend that M ratings rely on subjective judgments that could penalize firms with strong financials, essentially allowing supervisors to downgrade banks based on discretionary assessments rather than objective performance metrics.

This grievance has inspired a campaign to gut the M component of the CAMELS framework. In May, the House Financial Services Committee passed the unusually named HUMPS Act on a party-line vote, requiring the banking agencies to either eliminate Management ratings or restrict them to purely “objective measures.” Federal Reserve Vice Chair for Supervision Michelle Bowman recently signaled in her inaugural speech that she is prepared to move in this direction, with or without congressional prodding.

The banking sector’s complaints might sound reasonable on the surface. But Private Finance, Public Power demonstrates that discretionary management oversight is essential to effective bank supervision.

Conti-Brown and Vanatta show that supervisory discretion over management has deep roots in American banking. Indeed, it is a foundational principle: in an industry built on trust, the public needs assurance that bank leaders possess the competence and integrity to safeguard depositors’ money.

Conti-Brown and Vanatta trace the rise of discretionary management oversight to the New Deal and the implementation of federal deposit insurance. Before the 1930s, bank shareholders faced double liability for losses, creating powerful incentives for owners to monitor management closely. This market discipline meant supervisors could focus primarily on bank solvency and step in only when a bank’s financial metrics warranted closure.

Deposit insurance fundamentally changed this equation. With shareholder liability eliminated, the government became the residual risk bearer. FDIC Chair Leo Crowley grasped the implications immediately. As Conti-Brown and Vanatta document, Crowley reoriented “examiners’ attention away from bank balance sheets, which told only a retrospective story of past decisions, to bank management, which enabled examiners to evaluate a bank’s future prospects.”

This insight proved prophetic. When the CAMELS rating system was formally adopted in 1979, the Management component explicitly required supervisors to evaluate “the ability of management to properly administer all aspects of the financial business and plan for future needs and changing circumstances.”[2] (Private Finance, Public Power ends on the cusp of the 1980s’ neoliberal turn in bank supervision, so we will have to await the sequel for Conti-Brown’s and Vanatta’s take on the adoption and implementation of CAMELS.)

Importantly, Congress has repeatedly and explicitly endorsed discretionary management oversight. In 1999, the Gramm-Leach-Bliley Act authorized expanded financial activities for bank holding companies—but only if they were both “well capitalized” and “well managed.” The Dodd-Frank Act doubled down on this dual mandate in 2010, requiring that a BHC’s subsidiary banks also be “well capitalized” and “well managed.”

These statutory mandates matter. If supervisors were to evaluate banks using only objective financial criteria—as the industry now demands—Congress’s “well managed” requirement would become meaningless surplusage. The banking sector’s proposal would effectively gut explicit congressional directives.

Empirical research has vindicated Congress’s wisdom. Consistent with a substantial body of literature, a recent Federal Reserve working paper confirms that discretionary CAMELS ratings are strongly predictive of bank failure.[3] Studies from the Office of the Comptroller of the Currency and the Federal Reserve Bank of St. Louis show that Management ratings in particular outperform financial metrics in predicting future bank performance.

The logic is straightforward: supervisors’ evaluations of management quality prove more predictive than backward-looking financial data alone. Management deficiencies—including weak internal controls, poor governance structures, and inadequate risk management—often serve as leading indicators of future financial problems. When supervisors rely solely on reported financial results like capital and liquidity ratios, they may spot weaknesses too late.

Recent experience illustrates why restricting supervisors to objective financial metrics would be dangerous. Consider two prominent examples. OCC examiners identified Wells Fargo’s toxic sales culture as problematic and incorporated these concerns into its Management rating in 2010—long before its fake accounts scandal became front-page news. Similarly, Federal Reserve examiners began flagging weaknesses in Silicon Valley Bank’s risk management in 2018 and downgraded its Management rating to less-than-satisfactory in mid-2022. Supervisors issued urgent warnings that the board’s oversight was inadequate and the risk management program ineffective nearly a year before SVB became the second-largest bank failure in U.S. history. Up until the day of its collapse, supervisors rated SVB’s capital and liquidity as satisfactory—only the deficient Management rating signaled the serious problems ahead.

Private Finance, Public Power frames bank supervision as “bilateral, institutionalized discretion that the government uses to identify, monitor, manage, and resolve the residual risks” that banks generate. This framing illuminates the stakes of the current debate.

Banks are not simply seeking minor supervisory reforms. They are attempting to fundamentally rebalance the supervisory relationship by constraining regulators to a narrow set of backward-looking financial metrics. Doing so would strip supervisors of their ability to make forward-looking judgments about institutional risk—precisely the kind of qualitative assessment that is necessary to prevent failures in the modern financial system.

Banks argue that management considerations are already embedded in the other CAMELS components, and that poor management will show up in capital adequacy, asset quality, or earnings. This reasoning is flawed. The industry’s preferred approach would essentially return us to the pre-deposit insurance era, when supervisors focused on financial metrics alone. Supervisors would become glorified accountants, checking whether banks meet objective thresholds for capital, liquidity, and asset quality while being severely constrained in how they incorporate management practices into their assessments.

This approach would transform supervision from proactive risk management into reactive crisis response. Supervisors would intervene only after management failures become severe enough to appear in financial statements, by which point a bank’s problems may be too advanced to remedy.

Private Finance, Public Power demonstrates that discretionary management oversight emerged for good reason, and it remains essential today. The banking sector’s push to eliminate or constrain the M component would leave supervisors in a weak, reactive posture. As Conti-Brown’s and Vanatta’s history makes clear, the shift toward evaluating management was an essential adaptation to the realities of deposit-insured banking. We should not go back.

Jeremy Kress is an associate professor of business law at the University of Michigan Stephen M. Ross School of Business.

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[1] There is a related framework for bank holding companies.

[2] The rating framework originally contained just five components (CAMEL). The sixth component, Sensitivity to Market Risk, was added in the 1990s.

[3] Professor Kathryn Judge highlighted this study at a Brookings Institution symposium celebrating the launch of Private Finance, Public Power. See The History of Bank Supervision In America and The Road Ahead, Brookings, at 2:18:14 (June 10, 2025), https://www.brookings.edu/events/the-history-of-bank-supervision-in-america-and-the-road-ahead/.