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

In December 1863, the first Comptroller of the Currency, Hugh McCulloch, offered the government’s aid to bankers who would join the new national banking system: “The sincere efforts of the Comptroller will not be wanting to make the system a benefit to the country.” With the hand of partnership extended, McCulloch expected bankers to return the favor. “May he not expect that these efforts, on his part, will be sustained by the efforts of the managers of the banks that have been or may be organized under it?”[1]

We call that union of efforts—from the government, from the banks—bank supervision: the bilateral, institutionalized discretion that the government and banks use to identify, monitor, manage, and resolve the residual risks that private actors generate through the financial system. Very little of the financial world of the 1860s has stayed the same; it is both fair and trivial to say that a bank examiner in the 1860s transported to the 2020s would not recognize the tools and systems he encountered. But at its heart, McCulloch’s vision of private financiers and public officials working together to manage financial risk for the nation’s benefit continued to define, even as it evolved, the unusual and idiosyncratic American financial system throughout the nineteenth and twentieth centuries.

As the contributions to this symposium highlight, supervision as institutionalized discretion has exhibited two essential, sometimes apparently contradictory qualities across the long sweep of its history: dynamism and resilience.

That dynamism came, as Naomi Lamoreaux’s response notes, first from early Comptrollers like McCulloch and continued through the Great Depression, the implementation of holding company and antitrust legislation, the reversal of risk tolerances in the 1960s, and the advent of non-prudential supervision in the 1970s. In each case, bank regulators and supervisors both took thin statutes and breathed meaning into the administrative shell Congress created. They exercised dynamic discretion, interpreting and reinterpreting what it meant for a bank to be safe, sound, big, fair, or other broad terms that animated supervisory authority. Using chartering, examination, forbearance, and receivership, the OCC sought to ensure the new national banks were a benefit to the country, even if in doing so their actions were more in keeping with the spirit than the letter of the law. As Nicholas Parrillo observes, “the story of the early OCC is of interest partly because its buildup of discretion and autonomy did not originate in statutory text but in administrators’ invocation of a purposive and consequentialist approach.”

From that point forward, as the weight of risk management responsibility moved between private bankers and public servants, and later among competing public agencies, officials reshaped supervisory tools to meet new needs. We agree with Brian Feinstein’s introductory observations: “across history, their core task—risk management—has shifted focus: preventing bank failures …, safeguarding depositors, maintaining macroeconomic stability, or juggling ‘political’ duties such as merger review, consumer protection, and community reinvestment.”

Although at one level “dynamism” and “resilience” may be antithetical, it is supervision’s dynamism that in fact accounts for its resilience. As many of our interlocutors observe, including Kate Judge, Jeremy Kress, and Naomi Lamoreaux, Congress created such breadth in the supervisory apparatus precisely to solve the difficult and recurring problems of financial risk management whose very difficulty is their dynamism. This delegation may reflect in part Congress’s own poor performance as a bank supervisor, as our analysis of the failure of the Freedman’s Bank demonstrates. But more than that, Congress recognized time and time again that financial risk management involves 1) tradeoffs among competing policy priorities that Congress has set and 2) constant evaluation of aspects of banking businesses (including, as Kress argues, the quality of bank management), which are not reducible to bright line rules.

That discretion can be automated in part, to be sure. Our story ends in 1980 in part because the enthusiasm to get the government out of the business of shared risk management surged during the 1980s through the 2000s, culminating in part in the Global Financial Crisis of 2008. That turn of history, including in its reinterpretations and revisions today, is why we think, with Yesha Yadav, that digital, algorithmic, and artificial intelligence will not permanently and completely displace human supervisors making human judgements.

A core thesis of Private Finance, Public Power is that supervision differs meaningfully from regulation and legislation. Thus, it has a distinct history worth telling that must not simply recite the standard stories of either legislation or regulation. Jonathan Macey contends that the book doesn’t “always clearly distinguish between the act of regulating and the act of supervising.” This observation follows Macey’s fair assertion that “it stands to reason that if there is a distinction between supervision and regulation, there also should be a distinction between supervisors and regulators.”

Part of our answer to Macey’s critique is that in the messy financial and political history of the United States, nothing stands to reason. If our primary thesis is that supervision is different, our secondary thesis is that its history has not yielded anything like an optimal or logically consistent bank supervisory system. The story we document shows that there are compelling reasons why regulators and supervisors would be—and have been—one and the same, and further why the boundary between the two might not be clearly distinguishable. That failure of distinction does not obviate the claim that supervision—and supervisors—are different from regulation and regulators in some important respects. It just invites inquiry into how and why those two approaches diverge.

Regulation and supervision reflect governance options, given by Congress to agencies like the Comptroller, the Fed, and the FDIC, that operate in relation to one another. Policymakers might regulate when they feel certain enough about the relevant risks to write black letter rules applicable throughout the system. At times, those rules are quite complex, layered, and preempt supervisory discretion. They may also regulate when they lack the institutional capacity or political legitimacy to supervise. When deregulating, and thus shifting more risk onto the private sector, they may simultaneously increase—or at least seek to increase—supervisory oversight to better monitor those risks and advise private actors on how to manage them. Deregulation and desupervision, then, do not have to move in correlation. In between, they may impose supervisory standards that gradually solidify into rules (i.e., supervision can occur before regulation), or forbear on regulations, treating them as discretionary when by their plain text they are not.

This ambiguity has made generations of bankers (and their lawyers) deeply uncomfortable, sometimes outright hostile, to the facts of supervision. Supervision, in that view, should be the point of the spear wielded by regulators, the compliance-with-law function, neither more nor less.

There may be something to that model of supervision and regulation. It certainly has adherents in the 2020s. What it lacks is any basis in history. That is not the system that Congress created and recreated and expanded over and over again over 150 years.

That system is also, Paul Tucker reminds us, uniquely American. By interrogating our analysis in international perspective, Tucker reasonably claims that we selected the wrong end date. We say that the world changed on or about 1980, with the Volcker shock and the ascendancy of neoliberalism. Tucker points instead to 1974, when the Herstatt and Franklin National Bank failures and the consequent formation of the Basel Committee on Banking Supervision demonstrated that “all the major financial centers are interdependent.” U.S. supervisory history to that point might have been exceptional, but it could no longer stand alone.

We agree that financial internationalization is a tremendously important theme, and one that is largely, although not completely, absent from the book. It is also a theme in which the formation of the Basel Committee is not an end but a beginning, one that would have required taking the story forward through the global crises of the 1980s and 1990s, into the Global Financial Crisis and beyond. We are interested in that story—so interested in fact that we may be compelled to write another, separate book. The very fact that the 1974 crises did not create a global accord on capital and supervision until 1988 is part of that fascinating story, but there is much more to it besides, including the liberation of the dollar as a pegged international reserve currency, and with it the end of Bretton Woods; the rise of the central banker as the technocrat par excellence, preferring the tools of open market operations over bank supervision to manage financial risk; the (brief) neoliberal turn away from supervision that ended in the tears of 2008; and the surge of populism on the right and left that simultaneously, sometimes incoherently, pushed for more supervision of financial risk while also battling to get the government out of markets once and for all.

That is a story worth telling. It is not, however, the story of bank supervision prior to 1980. That explains our desire to separate those accounts, to return to the debate another day.

Finally, many of the reviews are interested in what a work of history can say to the present moment. In particular, they have brought Private Finance, Public Power, into a conversation about originalism, the unitary executive, and the administrative state that we did not anticipate when we began this project nearly a decade ago. “The administrative state is again at a cross roads,” Judge writes. As we have noted throughout this reply, Congress, not the executive, created the bank supervisory institutions. Congress, not the executive, tasked them with ambiguous and cross-cutting mandates. Congress, not the executive, has continued to reaffirm institutionalized discretion as the preferred means of identifying, monitoring, managing, and resolving the residual risks that private actors generate through the financial system.

Although we did not set out to intervene in this debate, our book makes a significant and unambiguous contribution to it. As Feinstein writes, “For judges examining the extent to which congressional delegations of authority are consistent with our history and tradition, Conti-Brown and Vanatta show that strong agencies have exercised discretion over one of the economy’s most critical sectors since the 1860s. For those judges that are skeptical of ‘novel’ institutional arrangements, Conti-Brown and Vanatta’s book shows that—in a world in which institution-building is shaped by contingency—novelty is the norm.”

That history makes judicial arguments against novelty and in favor of historical continuity much harder to make. “There is no implication in any of these accounts that the bureaucracies that developed in this way were in any sense optimal,” Lamoreaux writes. “What these histories do suggest, however, is that the theory of the unitary executive is based on a misunderstanding of the constitutional principles that underpinned the early administrative state. To the extent that the Supreme Court forces federal agencies to restructure in conformity with this invented theory, it may well destroy their hard-won workability.”

Let us conclude with a note of gratitude. This book incubated for a long time, almost ten years since we first sat down together to explore the history of the bank examination report as a fascinating artifact of the nineteenth century that exercised enormous influence long into the twentieth. We spent thousands of hours on this project, aided by a fantastic research team, and made better by our colleagues in law and history, many of whom have engaged with this project from its earliest days all the way into the pages of this symposium. For that incredible support, words of gratitude fall short. We can only say that this book succeeds precisely for the debate that it has inspired in these pages. We hope this is the beginning.

Peter Conti-Brown is the Class of 1965 Associate Professor of Financial Regulation at The Wharton School of the University of Pennsylvania. Sean Vanatta is a Senior Lecturer in Financial History and Policy at the University of Glasgow.

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[1] Comptroller of the Currency, Instructions (July 7, 1863), reproduced in U.S. Senate, Message from the President of the United States, transmitting a letter from the Secretary of the Treasury, in response to Senate resolution of December 6, 1881, concerning instructions to and reports of certain examiners of national banks, &c., 47 Cong., 1 Sess., Ex. Doc 31 (1881), 12.