Private Finance, Public Power | Peter Conti-Brown

The History of the U.S. Banking System

Dan Loney: The connection between the banking sector and regulation has been an important one for many decades, and a new book takes a deeper dive into the historical connection between bank supervision and the institutions. Pleasure to be joined here in studio by Peter Conti-Brown, who’s an associate professor of financial regulation here at the Wharton School. He is co-author of the new book, Private Finance, Public Power: A History of Bank Supervision in America. Great to see you again, my friend. How are you?

Peter Conti-Brown: Always a delight to be here, and celebrating the birth of a new book. Couldn’t be happier.

Loney: What makes it important to look at bank supervision from a historical perspective, maybe especially right now?

Conti-Brown: If you think about what we’re experiencing in 2025 in the political economy of America, we’re having really robust debates about how much private sector innovation should be occurring, and how much public sector, meaning the government, responsibility should occur, and especially what forms both of these things should take. When we’re talking about trade, we’re talking about private sector innovation subject to public sector control. Tariffs are about that control.

When you’re talking about questions of government efficiency — DOGE, Elon Musk, all that kind of thing — we’re talking about, how can government be more efficient versus how are we destroying the capacity for risk management on the public sector? Bank supervision is a kind of microcosm of these debates. What my co-author, Sean Vanatta, and I argue in this book is that these arguments are both very old. We’ve been having debates since Alexander Hamilton about how you manage risk in the economy across that public sector divide.

But they also take on new and interesting turns. Our book takes the history through 1980, and we explore where this vast apparatus of risk management came from. When you think about the 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 going to manage that risk, right? And the food truck’s going to manage that risk. And we have health regulations governing various aspects of a food truck. But by and large, buyer beware. Enjoy your burrito. Hope it goes well. But when you walk into a bank, everything changes.

Loney: Right, and you talk about the fact that having the right definition of supervision is an important component of this process.

Conti-Brown: Yeah, it sure is. The most popular understanding of banks’ interaction with the government is through the R word, regulation, right? The term has become so fraught with meaning. Regulation is almost a bad word. I work in the Department of Legal Studies and Business Ethics at Wharton, but my chair is in financial regulation. My mother-in-law told me once, “You should call yourself a professor of business ethics. That sounds so much nicer than a professor of regulation.” She’s right about that, in a sense.

Regulation has this meaning, but that is what’s so fascinating about that. When we talk about regulation, these are the rules created by agencies like the Federal Reserve or the FDIC. They matter enormously. But that’s not how risk is managed in our financial system. It’s managed behind closed doors, in conversations between employees of the private banks and employees of these regulators who are doing something very different.

They’re not writing rules. They’re making judgment calls, and they’re managing risk through the processes of examination and enforcement, what we call supervision. So, what we’re trying to do in this book is just say, “Hey, regulation matters. You should pay attention to that for sure, no question. But it doesn’t matter nearly as much as where the rubber hits the road, and that rubber hits the road in bank supervision.”

Loney: Going back more than 100 years, there came a point where bank supervision became almost a necessary component, correct?

Conti-Brown: Yeah, absolutely. The birth of federal bank supervision — calling that date is a little bit difficult, because it’s not like a person who’s born becomes a teenager, an adult, and then dies. It gets born and reborn and changes again. But we’ve had bank examiners in the federal government’s employ since the Civil War. The biggest inflection point in our book, and we argue in its history, is in the Great Depression. Between the Hoover administration, the Roosevelt administration, 1932, ’33, the entire banking system shut down. We called it euphemistically a holiday, but it wasn’t anything to celebrate.

It was the question of whether we were going to turn into a fascist state like in Italy or Germany. And what we did instead was reinvent American capitalism through the process of bank supervision. What we said was, “These bank supervisors were going to come in and figure out which were the good banks, which were the bad ones. And thereafter, individuals, consumers, businesses, families, could trust in the banks, not because the banks said so, but because a combination of the banks and the government said so.”

Our book is a history of how did that come to be? What is the nature of that supervision, those negotiations between public and private power? And understanding that tells us not only about history for its own sake, where the world’s most robust economy and financial system came from, but how do we navigate these very same debates that we’re having in 2025?

How Has Bank Supervision Changed?

Loney: That’s the unique thing, is the historical perspective of this. When you think about all the things that have occurred over centuries, that banking and supervision and regulation has had to react to all of these different components and adjust, probably to a degree, as we went along, correct?

Conti-Brown: It’s been fascinating to see just how much crisis and scandal has caused Congress and supervisors to change the way that they approach things. One of the biggest changes that we saw was after the Great Depression, and through this bank holiday and its recovery, bank supervisors got an enormous amount of authority that they were exercising. They were exercising that authority through discretion, and the discretion was like, you look at a balance sheet that is on paper, in black and white, identical between two banks, right? But a 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.”

What supervision became in the Great Depression was that discretion was really pretty empowered, so you had 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 to take.” A very big change came from Congress, actually, not the banks or the bank supervisors, by saying, “Well, supervisors are 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 more to do.” Then they were in charge of enforcing anti-discrimination laws, they were in charge of enforcing consumer protection laws, and they were in charge of enforcing community reinvestment, and anti-money laundering, and different elements like that, all through the same apparatus.

We saw just this really dramatic expansion of that footprint, even still today, where there are big debates about, what are the appropriate contours of bank supervision and bank supervisory discretion? Should they be allowed to say to a bank, “Hey, I’m not going to tell you, in black and white, rule of the road that you’re breaking the law. I’m just telling you that you’ve got to stop doing this thing.” This is sometimes bank supervision by the raised eyebrow, right? We’re having a debate — it was in the magazine American Banker — should bank examiners have the discretion that they have? As I read that, I was like, “Well, do I have a book for you.”

Loney: How does the financial crisis of 2008 play into the history of bank supervision, and what obviously had to be changed at that point?

Conti-Brown: We stopped the book in 1980, in part, because we wanted to convene a debate about it. And if you start telling stories about people who are still alive, they become pretty invested in those stories, and it’s harder to have that debate. But we have a lot to say about 2008. Part of what leads up into 2008 is this cycle, which we call de-supervision. You’ve heard of deregulation. Well, de-supervision is where you try to make supervisors less responsible for their own discretionary decisions and push more of that decision-making onto the private sector.

The long arc of the 1990s up to the 2008 financial crisis was a big de-supervisory turn. This came about through the creation of Basel II, this global framework. It was basically saying to the regulators, “Don’t supervise banks in the same way. Just make sure that they have systems in place that are supervising themselves.” In 2008, all of that blew up. It basically came to stand for the proposition that banks can’t self-supervise.

From 2008 into about 2017 was a resurgence of discretionary bank supervision. That’s when we got things like the stress tests and the living wills and all kinds of things like that. My co-author Sean and I have been writing this book for a long time. We were graduate students together in the early 2010s at Princeton, getting our PhDs in history, and we decided that we wanted to start writing about this. Even in the life of this book, while we’ve been writing it, we’ve seen history take two more turns of the cycle about what is appropriate use of supervisory discretion. This has something to say to risk management, not only in 2025, but as the future continues to take those turns.

Loney: But then even when you think of the Great Depression, and then you move through the next several decades, you have global conflict that plays into a lot of the dynamics of the decision process. There are also financial issues. How do you think the process of what we saw supervision go through back then has kind of set the framework for where we are now?

An American Invention

Conti-Brown: Bank supervision is unquestionably an export of the United States. Central banking was not created in the United States. It was created in Sweden and England. But the relationship of risk management — where the public sector owns the residual risk, is on the hook when the system collapses — and all of the bank examination that led up to it, that was an invention of the American experience, mostly in the late 19th century. And then crystallized in the Great Depression.

What that led to in the 1970s was a sense that we need to do this in a more globally harmonized way. The Basel Committee on Bank Supervision, which came out of the Bank for International Settlements in Basel, Switzerland, was the institutionalization of that conversation. And what we’re seeing right now in the 2020s is kind of a disintegration of the collective global sense that this is something that we all as humans need to resolve together, as opposed to solving in individual national jurisdictions.

The logic behind the globalized harmonization of these rules is really strong. If you have different nations zigging and zagging about what constitutes a well-supervised bank, then you’re going to have really hard problems, because money does not know national boundaries. It flows throughout the world. But the logic behind nationalizing these things is important, too. It’s the logic of nationhood, right? It’s a logic of democratic accountability. And it’s certainly the zeitgeist today.

Left, right and center, there is just a lot of skepticism about the idea that we can control global risks exclusively through global bodies, as opposed to having national elections that really determine the contours of these issues. The only thing I could say to that is just, “Grab your bucket of popcorn. The future is an unknown country, and we have no idea how this movie is going to play out.”

Loney: What do you then hope that you’re bringing to light with this book that you and Sean have written?

Conti-Brown: Sean and I had a motto as we were writing the book, which is, “Every paragraph a dissertation.” The idea was that we were learning so many new things that had just never been engaged before in the literature, that in any paragraph that we are writing, a future PhD student could write a whole dissertation on that topic. What we’re trying to do is do the classic thing that historians always do, which is to say, “The way things are is the way things were, and the way things are new.” History has stayed the same, and history has changed, right? We’re always saying the same two things. What we want to say is that we want to tell the story of where this curious form of risk management across the public-private divide came from. We’ve got that story told well in this book, at least so we believe. But we also want to set the stage for a big debate about what we should then do with that history.

One of the things that we’re proudest of is that the book’s been endorsed by a bunch of people. We’re so grateful for their enthusiasm for the project. But two people in particular. One is Dan Tarullo, who was at the Federal Reserve from 2009 to 2017, and he was responsible from the Obama administration, really, for bank regulation after the crisis. [He has a blurb at the end of the book.] And then right after him is Randy Quarles, who was the chief bank supervisor under the first Trump administration. And they both read the book and loved it, and just said, you know, “This is the history. We need to have these fights.” And those two agree on basically nothing else, except that you should buy this book.