The History of Supervising Banker Competence

In a recent blog post, Peter Conti-Brown and Sean Vanatta, authors of Private Finance, Public Power: A History of Bank Supervision in America, argue that history clearly supports the longstanding role of US supervisors in evaluating bankers’ managerial competence.

They note that current industry lobbyists and sympathetic regulators want supervisors to avoid “qualitative” judgments and focus only on “material conditions” of safety and soundness. Such critics claim management assessments are “bad policy,” “bad law,” and “bad history,” they explain.

Rather than wade into current policy and legal debates, Conti-Brown and Vanatta focus instead on the historical record, which they say decisively contradicts the argument that managerial focus is a recent invention. Supervisors have evaluated management for decades, they recount. Even before the CAMELS rating system was introduced in 1979, regulators routinely assessed leadership quality. A 1977 GAO report showed “fixed attention on managerial competence,” and the FDIC assigned ratings such as “good,” “fair,” or “poor.”

Historical exam files reinforce this tradition. At Citizens Trust Company of Atlanta in the 1960s, for example, supervisors repeatedly evaluated President L.D. Milton, initially calling him “rather outstanding,” but later only “fairly capable." Their reports criticized weak succession planning and “mediocre” officers. These judgments around managerial issues contributed to the bank’s designation as a problem bank.

The authors conclude that managerial supervision is deeply rooted in US regulatory practice. Eschewing it would be “an untested revolution,” not a return to any historical norm, they argue.

In an article contributed to our 2024 Compendium, Greg Baer, President and CEO of the Bank Policy Institute, offers the counterpoint in this debate. Therein, Baer calls for reforms to the bank examination and supervision processes to prioritize material financial risk issues.

“In recent years, bank examination has expanded significantly in scope and increasingly is used as a substitute for regulation, imposing significant restrictions on banks outside of public view,” he writes. “It is a major driver of the relative unattractiveness of bank equity, the migration of assets from the banking industry, and the drive for economies of scale through merger or acquisition, as that scale includes the ability to absorb massive examination and associated compliance costs.” ▸ Read More