Bank Supervision, Then and Now

Al asks a fascinating question as a comment to my last post about the relevance of blogging to legal scholarship.  I’ll have more to say on this, after giving the question some more thought, but first a post on the questionable relevance of bank supervision in the Dodd-Frank era.  

Consider a short story, Friends in San Rosario, by O. Henry. The story – fun in the way that most O. Henry short stories are fun, with some nice dialogue, a good yarn, and some twists and turns along the way – is interesting for the snapshot it offers into small-town banking supervision in the late 19^th century, during the National Bank Era.  Our supervisor in San Rosario puts the fear of God into these small-town bankers (well, mostly, but I won’t spoil it).  One wonders about the comparable position today, 100 years later, between and among bank supervisors and banks supervised.  I know very little, and would love to learn more, about the actual day-to-day experience of bank supervisors today.  My hunch is that, in light of the vast regulatory and balance sheet complexity that bank supervisors must analyze, bank supervisors use tools built for a different era.

Part of the difference between the bank supervision in San Rosario and bank supervision at, say, Citigroup, is the vastly transformed regulatory landscape that banks face today.  Since O. Henry’s time, we have seen the most enduring experiment with a central bank in American history, the advent of mandatory federal deposit insurance, the rise and fall of Glass-Steagall, the creation of bank holding companies, and an ever-increasing, ever-overlapping federal/state bank regulatory structure that makes our banks and bank supervisor in San Rosario look quaint, to say the least. 

The more relevant policy question today, though, is how banking supervision survives Dodd-Frank.  Prior to Dodd-Frank, the U.S. didn’t really have macroprudential banking regulatory regime in any real sense, except by extension of the microprudential regulation of bank holding companies or other large financial institutions.  Dodd-Frank initiates a new regime in this respect.  There is much to say about the way Dodd-Frank changes bank regulation, for better and worse (a debate I enter here and here).  But how does that new regulatory regime transform bank supervision?  Whither the bank supervisor in the era of stress tests, living wills, and the Financial Stability Oversight Council?

The fate of bank supervision represents an important opportunity for legal scholars, financial historians, and a variety of social scientists.  From historians, I would enjoy reading more on the evolution of bank supervision, and am curious if readers have any recommendations on that front.  Sociologists and anthropologists of finance have much to offer, too.  I am familiar with the excellent work of anthropologists Annelise Riles on global derivatives markets and Karen Ho on the day-to-day of investment bankers and traders in New York City.  Both accounts were enjoyable and very interesting.  But neither focuses on bank supervisors.  Does anyone have any other suggestions here? 

At its core, I simply wonder what bank supervision accomplishes in the Dodd-Frank era.  Long gone are the days of the San Rosario supervisor's power and skillset.  What survives in light of the last 100 years of legal, political, and financial innovations is an important question. 

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