The bank supervisory dance

Abstract

When three banks failed in the Spring of 2023, regulators were roundly criticized for failing to adequately supervise the now-insolvent institutions. Bank supervision—roughly defined as activities to address firm-specific risks that traditional regulations cannot—is of such importance to banking that, in addition to condemning these banks' executives, Congress demanded to know how regulators allowed such mismanagement to occur. Simultaneously, the banking industry is challenging fundamental assumptions about the power of regulators to even engage in supervision. Against this backdrop, examiners, regulators, and legislators must understand the legal framework within which supervision occurs and how that framework allows for contemporary supervision. This article argues that “bank supervision” is simply an umbrella term for the activities undertaken by agency officials across the government, just applied to banks by agency examiners. Rather than being a unique agency action, supervisors license applications, perform routine examinations of banks, offer guidance following those examinations, initiate enforcement actions, and conduct adjudications. Supervision only appears unique because regulators may engage in frequent and deep examinations and interpret and apply capacious regulatory authorities, the combination of which enables them to prevail in most enforcement actions. This article coins the term “supervisory dance” to describe the dynamic that leads banks to acquiesce to supervisors' recommendations made absent the force of law rather than fight future enforcement actions in court.