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Bank Supervision and Administrative Law

This article presents a systematic consideration of how administrative law doctrines apply to banking supervision, an unusual form of administrative practice. First, it describes the rationales for, and process of, bank supervision. Key here is an explanation of why financial regulation that is optimal in a narrow efficiency sense includes a supervisory function entailing considerable discretion. The relative opacity of some important features of this administrative practice has made it difficult for legal scholars to obtain a sufficiently informed understanding of the process to evaluate it against relevant legal norms and standards. Second, the article uses recent administrative law arguments lodged by banking interests against key supervisory practices as the springboard for an analysis of how our largely “trans-substantive” administrative law can be problematic in the context of specific mandates given by Congress to administrative agencies. It argues that courts considering how administrative law doctrine applies to agency practices must consider more fully the substantive law the underpins the mission and organization of the agency. In the context of banking supervision, Congress has regularly included in its amendments to banking law clear acknowledgement of the supervisory function, and has at times created expectations for how that function will advance safety and soundness regulation. When these statutory provisions are taken appropriately into account, arguments that supervisory practices are consistent with administrative law requirements are considerably strengthened. Third, the article demonstrates how even a more tailored application of contemporary administrative law doctrines would miss a critical feature of banking supervision – that it is premised on an ongoing relationship between banks and supervisors. Judicial review of agency action usually focuses on discrete agency actions, thereby eliding this critical fact. As a result, administrative law doctrines such as the “practically binding” test for agency guidance peculiarly inapposite. The last part of the article offers a tentative proposal for shifting the administrative law review of supervisory actions to focus on the iterative nature of the supervisory relationship.