Peter Conti-Brown, an associate professor of financial regulation at the Wharton School of the University of Pennsylvania, and Sean Vanatta, a senior lecturer at the University of Glasgow, trace the history in their ambitious book Private Finance, Public Power. Once I learned the two were working on this book, I eagerly awaited its release, as I had previously reviewed Conti-Brown’s The Power and Independence of the Federal Reserve (“The Ulysses/​Punch Bowl View of the Fed,” Winter 2016–2017) and Vanatta’s Plastic Capitalism (“To Control Capitalism or Not?” Spring 2025).

Supervision Gone Awry

Private Finance, Public Power leads with an introductory chapter that chronicles Silicon Valley Bank (SVB), which failed spectacularly in mid-March 2023. SVB is a good, contemporary starting point for a review of bank supervision: The failure raised a flood of pertinent questions, many of which have still not been satisfactorily answered.

The primary federal supervisor of SVB, the Federal Reserve, and the state supervisor, the California Department of Financial Protection and Innovation, were blindsided by its sudden implosion. Another federal bank supervisor, the Federal Deposit Insurance Corporation (FDIC), held its quarterly press conference on bank performance in late February of that year, and SVB was not on the list of problem banks released that day, nor was it a contingency in the FDIC’s December 2022 financial statements.

There was a massive run on SVB, notwithstanding FDIC coverage up to $250,000 per depositor. Federal bank supervisors ultimately agreed to bail out all depositors, including those above that level, even several billionaires. The intervention may have worsened the panic. Conti-Brown and Vanatta are on point about the awful optics of the bailout: “[Uninsured] depositors … clamored to be made whole, despite no plausible legal claim in their favor.” They also highlight the contradiction between the bailout and recent reform measures: “The country had a proper banking crisis, just fifteen years after the last one that was, in Barack Obama’s famous words, supposed to put a stop to taxpayer bailouts once and for all.”

The SVB failure was a repeat of over a century of similar breakdowns: “supervisors did not fully appreciate the extent of the vulnerabilities as [SVB] grew in size and complexity.” This explains the book’s title: “These public officials are responsible [for SVB’s risk-taking]…. The truth is that the system of banking in the United States is composed of private finance, backed inescapably by public power.”

Why So Many Bank Supervisors?

As Conti-Brown and Vanatta trace the history of bank supervision, it becomes clear how we ended up with so many supervisors. Most banks in the early 1800s were state chartered:

State-chartered banks came into existence as extensions of sovereign state authority. Monitoring and oversight … were the prerogative of the sovereign, exercised through the common law “visitorial power” … to ensure that charter provisions were being followed and to take corrective action if they were not.

In other words, there were many supervisors because political leaders wanted them supervised.

The federal government only “exercised monitoring and visitation over the [First Bank and Second Bank] of the United States” during their separate 20-year federal histories, (1791–1811 and 1816–1836, respectively). Oversight varied for the two banks: The First Bank’s oversight was limited to the submission of basic “balance sheet information to the Treasury,” while the Second Bank’s oversight involved “more affirmative investigatory powers.”

It wasn’t until the Civil War era that the first dedicated federal bank supervisory agency came on the scene. The National Bank Act of 1863, which created the Office of the Comptroller of the Currency (OCC), led to “a streamlined administrative process for chartering national banks … [while the OCC] would have additional discretion to investigate banks.” The first comptroller, Hugh McCulloch, “would decisively shape the early practices of federal bank supervision by making the Currency Bureau an effective, autonomous institution and by essentially creating the system of regular federal bank examination.” The separate state oversight of state-chartered banks continued and still does to the present day.

But as banking panics became frequent in the late 1800s and early 1900s, the authors argue it was clear the federal system

was not equipped to confront financial crisis…. In times of crisis, supervisors needed money, and plenty of it…. [F]ederal officials and financial reformers alike recognized that the federal government remained politically responsible for the fate and function of the financial system…. After the Panic of 1907, the public would seek to reassert control.

The politics was divided on the topic, but

many Democrats, drawing on populist tradition, insisted on greater public authority through enhanced government oversight…. It was into this mix that Congress inaugurated the Federal Reserve System as yet another risk management alternative…. Woodrow Wilson … decided to make currency reform one of the keystone efforts of his administration.

Layering of federal bank supervision began with the Federal Reserve also becoming “lender of last resort” during crises.

What Supervisors Do

In the life cycle of a bank, supervisors take on a variety of roles. In the book’s chapters on the early history of bank supervision from the late 1700s to the 1860s, these are discussed in the context of when states chartered and supervised banks. According to the authors, there were five banks in the United States by 1791 and over 300 banks by 1820. At the beginning of a bank’s life, the charter could be secured through a “special legislative charter” or, in free-banking jurisdictions, upon application to the supervisor “on the basis of clear … rules, most often linked to minimum capital standards and requirements to back note issues with bonds deposited with the state.” The applicant bank would coordinate with the state banking commissioner, “who verified that bank organizers had satisfied chartering requirements.” At the end of a bank’s life, the supervisor is called upon to revoke the charter. The authors make clear that there was a dearth of options between a bank’s chartering and its failure to address the condition of a weak bank: “There is no punishment but death.”

My first job after graduating from university involved examining banks, another task for bank supervisors. The FDIC handed me a Hermes typewriter, and I spent the next three years in Texas during a deep, statewide banking crisis. The authors describe this type of work as “the first public instance of the institutionalized discretionary approach to bank supervision.” Teams of bank examiners are on the front lines of supervision, meeting with bankers and conducting a deep review of documentation on a bank’s operations.

The practice began as a relatively narrow application of authority with a risk-based focus:

Before the 1820s, bank examinations sometimes occurred but were ad hoc affairs, usually taking place when chartering officials, believing a bank to be insolvent, used their common-law visitorial authority to investigate the bank.

In the subsequent centuries, examinations have been conducted on strong and weak banks alike, with greater resources committed to examining the latter. In the 19th century, examiners were responsible for a heavy workload and

could not afford to spend sufficient time in banks. In 1892, there were 42 national bank examiners and 3,759 national banks, 89.5 banks per examiner…. [T]he amount allowed an examiner for the examination of smaller banks [was] not sufficient to compensate him for the time necessary.

Supervisors are also heavily involved with the related and alliterative tasks of failure and forbearance. The authors summarize the importance in early supervision history of safeguarding against failure:

Bank failure loomed over nearly every aspect of banking practice and policy in the antebellum era…. More than 15 percent of antebellum banks closed without redeeming their notes at full value.

During this period, the winding up of a bank was not undertaken by an expert administrative agency, but rather by “local courts and judges.” During the late 19th century, comptroller John Jay Knox Jr. developed the option of “forbearance—the intentioned choice not to exercise authority available to a bank supervisor[;] … a tool made for crisis.” As the need to respond to the panics of 1873, 1884, 1893, and 1907 presented the financial authorities with an opportunity to refine their crisis management skills, forbearance was employed in the hope that, with a little bit of time, a weak bank could morph into a strong one. Often, this hope was dashed.

The Bank Holiday and Deposit Insurance

Conti-Brown and Vanatta set the scene for bank supervision as the Great Depression set in:

On the eve of the banking crises, the U.S. banking system retained its uniquely byzantine institutional and supervisory complexity…. The new Federal Reserve System overlaid this structure…. These supervisory institutions, never in harmony, sharply diverged, laying bare shortcomings that would compound in the face of systemic crisis. The banking system’s most important weakness was that state and federal chartering competition enabled the formation of too many weak banks. By 1920, the nation was blanketed by nearly 30,000 individual banking firms, most of them small, under-capitalized, geographically confined, rural, and ripe for collapse…. Between 1921 and 1929, more than 600 banks failed each year.

In response, President Herbert Hoover panicked and “instructed the Comptroller not to do anything to rock the boat, and not to have any more bank failures…. [F]ederal officials united behind extraordinary forbearance.” Hoover chose denial, thinking that forbearance and patience would lead to a happy ending. Unfortunately, a bank that is insolvent and unprofitable gets deeper and deeper into insolvency. When the day comes when depositors run on the bank, that extra period of time the bank remained open and sustained losses means a deeper haircut for depositors.

As part of the 1933 nationwide bank holiday imposed by President Franklin Roosevelt, the authorities did the necessary triage to further cull the population of banks. An initial estimate revealed that only about “2,200 out of 5,938 national banks could be reopened at once and meet all demands on them.” A Treasury assessment placed the banks into categories: Class A (best), Class B, and Class C (worst). “The essential work of the holiday … would be drawing the lines between these categories and then working out a means of opening as many Class B banks as quickly as possible.” The discussion in the chapter on the bank holiday is quite strong.

Another “layer” of bank supervision was added in the 1930s with the establishment of the FDIC. “Advocates [of deposit insurance] had hoped that, by providing depositors confidence that bank promises would be honored even if the bank failed, insurance would halt deposit runs before they began and panics would pass into history.” This hope was not fulfilled when individual states set up such schemes “in the generation before the Great Depression,” and it has not been fulfilled to this day with the FDIC, as the failure of SVB made clear.

Doing Something About the Mishmash

In 1947, Hoover was appointed to lead a commission to rationalize the New Deal bank supervision structure: “Hoover saw the problem only through duplication, inefficiency, and opaque lines of authority; he wanted the prerogatives of an institutional designer starting afresh.” According to Conti-Brown and Vanatta:

The problem was not simply that agencies multiplied after major crises…. The problem … was that Congress created agencies to address similar risk management challenges from different, sometimes conflicting and sometimes complimentary, positions.

Many reengineering efforts have been introduced since the 1940s, but the vested interests have defended the indefensible and the structure remains.

Conclusion

Two of the final chapters’ major conclusions are puzzling. First, the authors both criticize and compliment the layered system of supervision that has emerged over the past 160 years of federal dominance at great fiscal cost:

No one would set out to design a supervisory system identical to … the United States…. Even so, the creaky set of institutions that has emerged through contingency and stress manages that risk in remarkably effective ways.

So, is the system effective or not? I’m unsure what the authors’ grand conclusion is here, but mine would be much more critical based on their own history.

Second, they end their history at 1980, and give this explanation for why:

We end in the 1970s in part because it marks the end of what historians have called the “New Deal Order” and the beginning of what has become increasingly characterized as the “Neoliberal Order.” … [W]e ended the book in 1980 because … the approach to managing residual risk during the Reagan-Bush-Clinton eras departed dramatically from the pendulum swings that had characterized the century before.

Do the authors consider the neoliberal era more stable than the “pendulum swings” of the New Deal Order? Given other things they write, I don’t think so. So, what to make of the above passage?

Regardless, Private Finance, Public Power offers an exhaustive history of US bank supervision, complete with 63 pages of substantive endnotes. I came away with a clearer understanding of how that supervision developed and what flaws resulted from that development.