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Peter Conti-Brown: Regulation has this meaning, but
that is what's so
00:00:03
fascinating about that as we
talk about regulation. These are
00:00:05
the rules created by agencies
like the Federal Reserve or the
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FDIC. They matter enormously.
But that's not how risk is
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managed in our financial system.
It's managed behind closed
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doors, in conversations
between employees of the private
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banks and employees of these
regulators who are doing
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something very different.
They're not writing rules,
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they're making calls, they're
making judgment calls, and
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they're managing risk through
the processes of examination and
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enforcement. Dan Loney: Welcome
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to the Ripple Effect, the
podcast that takes you on a
00:00:38
journey through the minds of
Wharton faculty. I'm your host,
00:00:41
Dan Loney. And in each episode,
we'll be diving deep into the
00:00:44
inspiration behind the
groundbreaking research that
00:00:47
Wharton professors have
conducted and exploring how
00:00:50
their findings resonate with the
world today. The connection
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between the banking sector and
regulation has been an important
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one for many, many decades, and
a new book takes a deeper dive
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into the historical connection
between bank supervision and the
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institutions themselves.
Pleasure to be joined here in
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studio by Peter Conti-Brown,
who's an Associate Professor of
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Financial Regulation here at the
Wharton School. He is co-author
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of the new book, <i>Private
Finance, Public Power: A History</i>
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<i>of Bank Supervision in America</i>.
Great to see you again, my
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friend. How are you?
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- Always a delight to be here, and
celebrating the birth of a new
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book. Couldn't be happier.
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- What is it that makes -- with
everything that's going on, what
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makes it important to look at
bank supervision from a
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historical perspective, maybe
even especially right now?
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- If you think about what we're
experiencing in 2025 in the
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political economy of America,
we're having really robust
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debates about how much private
sector innovation should be
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occurring, and how much public
sector, meaning the government
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responsibility, should occur,
and especially what forms both
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of these things should take. So
when we're talking about trade,
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we're talking about private
sector innovation subject to
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public sector control. So
tariffs are about that control.
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When you're talking about
questions of government
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efficiency, Doge, Elon Musk, all
that kind of things. We're talking
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about, how can government be
more efficient on the one
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hand, versus how are we
destroying the capacity for risk
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management on the public sector
on the other. And bank
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supervision is a kind of
microcosm of these debates. What
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my co-author, Sean Vanatta, and I
argue in this book is that these
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arguments are both very old.
We've been having debates since
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Alexander Hamilton about how you
manage risk in the economy
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across that public sector
divide. But they also take on
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new and interesting turns. And
so our book takes the history
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through 1980 and we explore
where this vast apparatus of
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risk management came from. When
you think about, you know, the
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way that you might manage the
risk that a burrito you buy from
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a food truck might make you
sick, the answer is, you're
00:03:06
going to manage that risk, right?
And the food truck's
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going to manage that risk. And
yeah, we have health regulations
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governing various aspects of a
food truck. But by and large,
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you know, buyer beware. Enjoy
your burrito. Hope it goes well.
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But when you walk into a bank,
everything changes.
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- And you talk about the fact that
truly having the right
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definition of supervision is an
important component of this
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process.
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- Yeah, it sure is. I mean, the
most popular understanding of,
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you know, bank's interaction with
the government is through the R
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word, regulation, right?
Very few people today -- the
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term has become so fraught with
meaning. Regulation is
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almost a bad word. You know, I
work in the Department of Legal
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Studies and Business Ethics at
Wharton, but my Chair is in
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Financial Regulation. My mother-
in-law told me once, "You
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should call yourself a Professor
of Business Ethics. That sounds
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so much nicer than a Professor
of Regulation." And she's
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right about that in a sense,
right? Regulation has this
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meaning. But that is
what's so fascinating about
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that. As we talk about
regulation, these are the rules
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created by agencies like the
Federal Reserve or the FDIC.
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They matter enormously. But
that's not how risk is managed
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in our financial system.?
It's managed behind closed
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doors, in conversations between
employees of the private banks
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and employees of these
regulators who are doing
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something very different.
They're not writing rules,
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they're making calls, they're
making judgment calls, and
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they're managing risk through
the processes of examination and
00:04:39
enforcement, what we call
supervision. So what we're
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trying to do in this book is
just this book is just say, "Hey,
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regulation matters. You should
pay attention to that," for sure,
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no question. But it doesn't
matter nearly as much as where
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the rubber hits the road, and
that rubber hits the road in
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bank supervision. - But
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going back probably well more
than 100 years, maybe longer,
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there came a point where bank
supervision became almost a
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necessary component, correct?
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- Yeah, absolutely. I mean, call
the birth of federal bank
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supervision -- calling that date
is a little bit difficult,
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because it's not like a person
who's born, becomes a teenager,
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and adult, and then dies.
It gets born and reborn and
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changes again. But we've had
bank examiners in the federal
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government's employ since the
Civil War. The biggest
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inflection point in our book,
and we argue in its history, is
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in the Great Depression. You
know, as you'll recall, between
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the Hoover administration, the
Roosevelt administration, 1932,
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'33, the entire banking system
shut down. We called it
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euphemistically a holiday. But
it wasn't anything to celebrate.
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It was the question of whether
we were going to turn into a
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fascist state like in Italy or
Germany. And what we did instead
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was reinvent American capitalism
through the process of bank
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supervision. What we said was,
these bank supervisors were
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going to come in and figure out
which were the good banks, which
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were the bad ones, and
thereafter, individuals,
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consumers, businesses, families,
could trust in the banks, not
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because the banks said so,
but because a combination
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of the banks and the government
said so. And our book is
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a history of, how did that come
to be? What is the nature of
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that supervision, those
negotiations between public and
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private power? And that's --
understanding that tells us not
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only about history, for its own
sake, where the world's most
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robust economy and financial
system came from, but how do we
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navigate these very same debates
that we're having in 2025?
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- Well, that's the unique thing,
is the historical perspective of
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this. When you think about all
the different things that have
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occurred over the course of
century after century, that
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banking and supervision of it
has had to react and
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regulation has had to react to
all of these different
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components and adjust, probably
to a degree, as we went along,
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correct?
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- Yeah, it's been
fascinating to see just how much
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crisis and scandal has caused
Congress and supervisors to kind
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of change the way that they
approach things. One of the
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biggest changes that we saw was
after the Great Depression, and
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through this bank holiday and
its recovery, bank supervisors
00:07:13
got an enormously -- just an
enormous amount of authority
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that they were exercising. They
were exercising that authority
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through discretion. And the
discretion was here, just like,
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you know, you look at a balance
sheet that is on paper in
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black and white, identical
between two banks, right? But a
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supervisor will look at one and
say, "That's on its way to rot,"
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and the other one will say,
"That's on its way to growth."
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And what supervision
became in the Great Depression
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was that discretion was really
pretty empowered, and so you had
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a lot more control on the public
side. Supervisors saying, "This
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risk is right for you to take,
this risk is not right for you
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to take." A very big change came
from Congress, actually, not the
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banks or the bank supervisors,
by saying, "Well, supervisors are
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doing such a good job managing
the financial system, so we
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haven't had a collapse of it
since the 1930s. Let's give them
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more to do." And so then
they were in charge of enforcing
00:08:04
anti-discrimination laws, then
they were in charge of enforcing
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consumer protection laws, and
they were in charge of enforcing
00:08:10
community reinvestment and anti-
money laundering and different
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elements like that all through
the same apparatus. And
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so we saw just this really
dramatic expansion of that
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footprint, even still today,
where there are big debates
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about what are the appropriate
contours of bank supervision and
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bank supervisory discretion? Or
should they be allowed to say to
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a bank, "Hey, I'm not going to
tell you in black and white, rule
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of the road, that you're breaking
the law. I'm just telling you,
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you got to stop doing this
thing." This is sometimes
00:08:43
bank supervision by the raised
eyebrow, right? And banks
00:08:47
right now were literally having
a debate, it was in the magazine,
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American Banker, today. Like,
should bank examiners have the
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discretion that they have? And I
wanted to say, as I read that, I
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was like, "Well, do I have a book
for you."
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- So then, even though it's maybe
not in the book itself, then the
00:09:03
financial crisis in 2008, how
does that play into the dynamics
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of the history of supervision
and what obviously had to be
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changed at that point?
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- You know, we stopped the book in
1980, in part, because we wanted
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to convene a debate about it.
If you start telling stories
00:09:18
about people who are still
alive, they become pretty
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invested in those stories, and
it's harder to have that debate.
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But we have
a lot to say about 2008.
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Part of what leads up into 2008
is this cycle, which we call de-
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supervision. We've heard of
deregulation. Desupervision is
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where you try to make
supervisors less responsible for
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their own discretionary
decisions, and push more of that
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decision making onto the private
sector. And the long arc of the
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1990s up to the 2008 financial
crisis was a big desupervisory
00:09:53
turn, and this came about
through the creation of Basel
00:09:57
II. This global framework was
basically saying to the
00:10:01
regulators, "Don't supervise
banks in the same way. Just make
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sure that they have systems in
place that are supervising
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themselves." 2008, all of
that blew up. It basically came
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to stand for the proposition
that banks can't self-supervise.
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And so 2008 into about 2017 was
a resurgence of discretionary
00:10:21
bank supervision. That's when we
got things like the stress
00:10:23
tests and the living wills and
all kinds of things like that.
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And what's what's funny, Sean
and I, my co-author and I, have
00:10:30
been writing this book for a
long time. We were graduate
00:10:32
students together in the early
2010s at Princeton, getting our
00:10:36
PhDs in history when we decided that
we wanted to start writing about
00:10:39
this. And even in the life of
this book, while we've been
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writing it, we've seen history
take two more turns in the cycle,
00:10:46
about what is appropriate use of
supervisory discretion. So this
00:10:50
has something to say to risk
management, not only in 2025, but
00:10:57
as the future continues to take
those turns. - But then
00:10:59
even when you think of the Great
Depression, and then you move
00:11:02
through the course of the next
several decades, obviously you
00:11:06
have global conflict that kind
of plays into a lot of the
00:11:10
dynamics of the decision
process, but obviously there are
00:11:13
also financial issues as well
that plays out. So then how do
00:11:17
you think the process of what we
saw supervision go through back
00:11:22
then has kind of set the
framework for where we are,kind
00:11:26
of right now?
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- Well, bank supervision is
unquestionably an export of the
00:11:30
United States. You know, central
banking was not created in the
00:11:33
United States. It was created in
Sweden and in England, the UK.
00:11:38
But the relationship of of risk
management, where the public
00:11:43
sector owns the residual risk,
it's on the hook when the system
00:11:46
collapses, that is an invention --
and all of the bank examination
00:11:50
that led up to it, that was an
invention of the American
00:11:53
experience, mostly in the late
19th century, and then
00:11:55
crystallized in the Great
Depression. What that led to in
00:11:59
the 1970s was a sense that we
need to do this in a more
00:12:03
globally harmonized way.
And so, you know, the Basel
00:12:07
Committee on Bank Supervision,
which came out of the Bank for
00:12:09
International Settlements in
Basel, Switzerland, was the
00:12:13
institutionalization of that
conversation. And what we're
00:12:16
seeing right now in the 2020s is
kind of a disintegration of the
00:12:21
collective global sense that
this is something that we all as
00:12:24
humans need to resolve together,
as opposed to solving in
00:12:27
individual national
jurisdictions. And the logic
00:12:30
behind the globalized
harmonization of these rules is
00:12:33
really strong. If you have
different nations zigging and
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zagging about what constitutes a
well supervised bank, then
00:12:39
you're going to have really hard
problems, because money does not
00:12:43
know national boundaries, it
flows throughout the
00:12:45
world. But the logic behind
nationalizing these things is
00:12:48
important too. It's the logic of
nationhood, right? It's the
00:12:51
logic of democratic
accountability. And it's
00:12:54
certainly the zeitgeist today.
Left, right and center, there's
00:12:58
just a lot of skepticism about
the idea that we can
00:13:05
control global risks just
exclusively through global
00:13:08
bodies, as opposed to having
national elections that really
00:13:13
determine the contours of these
issues. So it's -- the only thing I
00:13:16
could say that is just grab your
bucket of popcorn. The future is
00:13:19
an unknown country, and we have
no idea how this movie is going
00:13:22
to play out.
00:13:22
-- What do you then hope that
you're bringing to light with
00:13:26
this book that you and Sean have
written? - Sean
00:13:29
and I had a motto as we were
writing the book, which is, "Every
00:13:31
paragraph a dissertation." And
the idea was that we were
00:13:34
learning so many new things that
had just never been engaged
00:13:38
before in the literature, that
in any paragraph that we are
00:13:41
writing, a future PhD student
could write a whole dissertation
00:13:44
on that topic. So what
we're trying to do is do the
00:13:48
classic thing that historians
always do, which is to say, "The
00:13:52
way things are is the way things
were, and the way things are are
00:13:57
new." So history has stayed the
same and history has changed,
00:14:01
right? We're always saying the
same two things. What we want to
00:14:04
say is that we want to tell the
story of where this curious form
00:14:09
of risk management across the
public private divide came
00:14:12
from. And so we've got that
story told well in this
00:14:16
book, at least, so we
believe. But we also want to set
00:14:20
the stage for a big debate about
what we should then do with that
00:14:24
history. One of the things that
we're proudest of, you know, the
00:14:27
book's been endorsed by a bunch
of people, we're so grateful
00:14:30
for their enthusiasm for the
project, but two people in
00:14:32
particular who blurbed the back
of it. One is Dan Tarullo, who
00:14:36
was at the Federal Reserve from
2009 to 2017, and he was
00:14:40
responsible, from the Obama
administration, really, for bank
00:14:43
regulation after the crisis. And
so he blurbed it. And then right
00:14:47
after him is Randy Quarles, who
was the Chief Bank Supervisor
00:14:51
under the first Trump
administration. And they both
00:14:53
read the book and loved it, and
just said, you know,
00:14:56
"This is the history. We need to
have these fights." And those two
00:14:58
agree on basically nothing else
except that you should buy this
00:15:01
book. - Well, then we need to go
00:15:03
out and get it. Peter, great to
see you again. Thanks very much.
00:15:06
- Thank you. - Thank you. Peter Conti-
Brown, Associate Professor of
00:15:09
Financial Regulation here at
Wharton. The book coming out is
00:15:12
<i>Private Finance, Public Power: A
History of Bank Supervision in</i>
00:15:16
<i>America</i>. Thank you for listening
to the Ripple Effect. We hope
00:15:19
you found this episode
informative and engaging. Don't
00:15:22
forget to subscribe and leave us
a review so that we can continue
00:15:26
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