The Monetary Basis of Bank Supervision

The Monetary Basis of Bank Supervision

A series of statutory provisions codified at Title 12 of the U.S. Code empower special government officials known as supervisors to examine banks and tell bankers what to do, not just when bankers break bright-line rules, but whenever supervisors believe bankers are engaged in “unsafe and unsound practices.” Despite the unusually broad scope of these provisions, academic treatments of them are quite shallow. This Article provides a new scholarly account of bank supervision, resurrecting the lost history of supervisory law and recovering the original meaning of the terms “unsafe” and “unsound.” It argues that legislators gave government officials the power to control various aspects of bank operations because they understood banks to be government instrumentalities augmenting the money supply on behalf of the state. And it shows that supervisors’ mandate — to prevent unsafe and unsound banking — is a monetary one. The standard authorizes supervisors to address practices that jeopardize the bank money system by undermining a bank’s ability to redeem its monetary liabilities (e.g., bank notes and deposits) in base money (e.g., cash) on demand. In recent decades, scholars and practitioners have lost sight of this meaning, obscuring the monetary nature of bank liabilities and reducing safety and soundness to a vague platitude. Policymakers have permitted unsupervised nonbanks to issue competing money liabilities and banks to monetize volatile and complex “nonmonetary” assets. The 2008 crisis was due largely to these errors. As these flaws in the monetary architecture have not yet been fully rectified, further reforms are in order.

Lev Menand


July 17, 2019

I didn't find this helpful.This was helpful. Please let us know if you found this article helpful.
By |2019-08-13T13:27:05-07:00August 13th, 2019|Financial Regulation, Political Economy, Reference, Reforms|