Author: Lev Menand
Administrative agencies typically operate at arm’s length from the institutions they regulate, making rules and then enforcing them after the fact. Banks are different: they are not just regulated, they’re supervised. Special government agencies examine banks and tell bankers what to do, not only when bankers break bright-line rules, but whenever the agencies believe bankers are engaged in “unsafe and unsound practices.” Supervisors’ authority to identify and address these practices is so extensive that oversight mostly proceeds through confidential agency actions and rarely leads to litigation. As a result, supervision has received little attention from legal academics, even though it plays a critical role in our monetary architecture and its failure to fill that role was one of the reasons that the 2008 financial crisis was so severe.
This Article provides the first scholarly account of bank supervision, how it functions and why it exists. It argues that legislators gave government agencies the power to control various aspects of bank operations because Congress understood banks to be government instrumentalities augmenting the money supply on behalf of the state. Supervisors’ mandate—to prevent unsafe and unsound banking—is a monetary one. The “unsafe and unsound” standard authorizes officials to address practices that jeopardize the bank money system by undermining a bank’s ability to redeem its notes and deposits in 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.
Today, just twelve years since 2008, we are facing a renewed episode of “de-supervision.” Recent agency appointees have questioned the legitimacy of supervisory oversight, proposing to convert supervision into something akin to notice-and-comment rulemaking. This Article rejects their arguments, showing why agencies that coordinate the activities of government instrumentalities like banks do not fit neatly within traditional administrative law frameworks. Supervision is better understood as one of the terms and conditions of the banking franchise than as a form of administrative lawmaking restricting private liberty. Supervision has become so contested since the 1990s because changes to our monetary architecture have allowed unsupervised nonbanks to compete with banks and banks to engage in nonmonetary commercial activities. Structural reforms are needed to restore a stable equilibrium.