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Peter Conti-Brown: Regulation has this meaning, but
that is what's so fascinating about that as we
talk about regulation. These are
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the rules created by agencies
like the Federal Reserve or the 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 doors, in conversations
between employees of the private
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banks and employees of these
regulators who are doing something very different.
They're not writing rules,
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they're making calls, they're
making judgment calls, and they're managing risk through
the processes of examination and
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enforcement. Dan Loney: Welcome to the Ripple Effect, the
podcast that takes you on a
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journey through the minds of
Wharton faculty. I'm your host, Dan Loney. And in each episode,
we'll be diving deep into the
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inspiration behind the
groundbreaking research that Wharton professors have
conducted and exploring how
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their findings resonate with the
world today. The connection 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 into the historical connection
between bank supervision and the
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institutions themselves.
Pleasure to be joined here in 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 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 friend. How are you?
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- Always a delight to be here, and
celebrating the birth of a new book. Couldn't be happier.
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- What is it that makes -- with
everything that's going on, what makes it important to look at
bank supervision from a
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historical perspective, maybe
even especially right now? - 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 debates about how much private
sector innovation should be
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occurring, and how much public
sector, meaning the government responsibility, should occur,
and especially what forms both
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of these things should take. So
when we're talking about trade, we're talking about private
sector innovation subject to
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public sector control. So
tariffs are about that control. When you're talking about
questions of government
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efficiency, Doge, Elon Musk, all
that kind of things. We're talking about, how can government be
more efficient on the one
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hand, versus how are we
destroying the capacity for risk management on the public sector
on the other. And bank
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supervision is a kind of
microcosm of these debates. What 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 Alexander Hamilton about how you
manage risk in the economy
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across that public sector
divide. But they also take on 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 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 a food truck might make you
sick, the answer is, you're
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going to manage that risk, right?
And the food truck's 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, you know, buyer beware. Enjoy
your burrito. Hope it goes well.
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But when you walk into a bank,
everything changes. - And you talk about the fact that
truly having the right
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definition of supervision is an
important component of this process. - 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 word, regulation, right?
Very few people today -- the
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term has become so fraught with
meaning. Regulation is 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 Financial Regulation. My mother-
in-law told me once, "You
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should call yourself a Professor
of Business Ethics. That sounds 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 meaning. But that is
what's so fascinating about
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that. As we talk about
regulation, these are the rules 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 in our financial system.?
It's managed behind closed
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doors, in conversations between
employees of the private banks and employees of these
regulators who are doing
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something very different.
They're not writing rules, they're making calls, they're
making judgment calls, and
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they're managing risk through
the processes of examination and 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, 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 the rubber hits the road, and
that rubber hits the road in
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bank supervision. - But going back probably well more
than 100 years, maybe longer,
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there came a point where bank
supervision became almost a necessary component, correct?
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- Yeah, absolutely. I mean, call
the birth of federal bank 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, 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 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 in the Great Depression. You
know, as you'll recall, between
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the Hoover administration, the
Roosevelt administration, 1932, '33, the entire banking system
shut down. We called it
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euphemistically a holiday. But
it wasn't anything to celebrate. 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 was reinvent American capitalism
through the process of bank
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supervision. What we said was,
these bank supervisors were going to come in and figure out
which were the good banks, which
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were the bad ones, and
thereafter, individuals, consumers, businesses, families,
could trust in the banks, not
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because the banks said so,
but because a combination 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 that supervision, those
negotiations between public and
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private power? And that's --
understanding that tells us not 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 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 this. When you think about all
the different things that have
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occurred over the course of
century after century, that banking and supervision of it
has had to react and
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regulation has had to react to
all of these different components and adjust, probably
to a degree, as we went along,
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correct? - Yeah, it's been
fascinating to see just how much 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 biggest changes that we saw was
after the Great Depression, and
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through this bank holiday and
its recovery, bank supervisors got an enormously -- just an
enormous amount of authority
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that they were exercising. They
were exercising that authority 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 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," 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 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 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 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 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 anti-discrimination laws, then
they were in charge of enforcing
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consumer protection laws, and
they were in charge of enforcing community reinvestment and anti-
money laundering and different
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elements like that all through
the same apparatus. And so we saw just this really
dramatic expansion of that
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footprint, even still today,
where there are big debates 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 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, you got to stop doing this
thing." This is sometimes
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bank supervision by the raised
eyebrow, right? And banks 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 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." - So then, even though it's maybe
not in the book itself, then the
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financial crisis in 2008, how
does that play into the dynamics of the history of supervision
and what obviously had to be
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changed at that point? - 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 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. 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- supervision. We've heard of
deregulation. Desupervision is
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where you try to make
supervisors less responsible for 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 1990s up to the 2008 financial
crisis was a big desupervisory
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turn, and this came about
through the creation of Basel II. This global framework was
basically saying to the
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regulators, "Don't supervise
banks in the same way. Just make sure that they have systems in
place that are supervising
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themselves." 2008, all of
that blew up. It basically came 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 bank supervision. That's when we
got things like the stress
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tests and the living wills and
all kinds of things like that. And what's what's funny, Sean
and I, my co-author and I, have
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been writing this book for a
long time. We were graduate students together in the early
2010s at Princeton, getting our
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PhDs in history when we decided that
we wanted to start writing about 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, about what is appropriate use of
supervisory discretion. So this
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has something to say to risk
management, not only in 2025, but as the future continues to take
those turns. - But then
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even when you think of the Great
Depression, and then you move through the course of the next
several decades, obviously you
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have global conflict that kind
of plays into a lot of the dynamics of the decision
process, but obviously there are
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also financial issues as well
that plays out. So then how do you think the process of what we
saw supervision go through back
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then has kind of set the
framework for where we are,kind of right now? - Well, bank supervision is
unquestionably an export of the
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United States. You know, central
banking was not created in the United States. It was created in
Sweden and in England, the UK.
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But the relationship of of risk
management, where the public sector owns the residual risk,
it's on the hook when the system
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collapses, that is an invention --
and all of the bank examination that led up to it, that was an
invention of the American
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experience, mostly in the late
19th century, and then crystallized in the Great
Depression. What that led to in
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the 1970s was a sense that we
need to do this in a more globally harmonized way.
And so, you know, the Basel
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Committee on Bank Supervision,
which came out of the Bank for International Settlements in
Basel, Switzerland, was the
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institutionalization of that
conversation. And what we're seeing right now in the 2020s is
kind of a disintegration of the
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collective global sense that
this is something that we all as humans need to resolve together,
as opposed to solving in
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individual national
jurisdictions. And the logic behind the globalized
harmonization of these rules is
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really strong. If you have
different nations zigging and zagging about what constitutes a
well supervised bank, then
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you're going to have really hard
problems, because money does not know national boundaries, it
flows throughout the
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world. But the logic behind
nationalizing these things is important too. It's the logic of
nationhood, right? It's the
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logic of democratic
accountability. And it's certainly the zeitgeist today.
Left, right and center, there's
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just a lot of skepticism about
the idea that we can control global risks just
exclusively through global
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bodies, as opposed to having
national elections that really determine the contours of these
issues. So it's -- the only thing I
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could say that is just grab your
bucket of popcorn. The future is an unknown country, and we have
no idea how this movie is going
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to play out. -- What do you then hope that
you're bringing to light with this book that you and Sean have
written? - Sean
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and I had a motto as we were
writing the book, which is, "Every paragraph a dissertation." And
the idea was that we were
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learning so many new things that
had just never been engaged before in the literature, that
in any paragraph that we are
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writing, a future PhD student
could write a whole dissertation on that topic. So what
we're trying to do is do the
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classic thing that historians
always do, which is to say, "The way things are is the way things
were, and the way things are are
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new." So history has stayed the
same and history has changed, right? We're always saying the
same two things. What we want to
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say is that we want to tell the
story of where this curious form of risk management across the
public private divide came
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from. And so we've got that
story told well in this book, at least, so we
believe. But we also want to set
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the stage for a big debate about
what we should then do with that history. One of the things that
we're proudest of, you know, the
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book's been endorsed by a bunch
of people, we're so grateful for their enthusiasm for the
project, but two people in
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particular who blurbed the back
of it. One is Dan Tarullo, who was at the Federal Reserve from
2009 to 2017, and he was
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responsible, from the Obama
administration, really, for bank regulation after the crisis. And
so he blurbed it. And then right
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after him is Randy Quarles, who
was the Chief Bank Supervisor under the first Trump
administration. And they both
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read the book and loved it, and
just said, you know, "This is the history. We need to
have these fights." And those two
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agree on basically nothing else
except that you should buy this book. - Well, then we need to go
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out and get it. Peter, great to
see you again. Thanks very much. - Thank you. - Thank you. Peter Conti-
Brown, Associate Professor of
00:15:09
Financial Regulation here at
Wharton. The book coming out is <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
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00:15:26
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