The Discretion Dilemma

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Author: FABIO NATALUCCI
Publication: F&D Magazine
Date: December 2025
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Central claim: Bank supervision emerged not from deliberate design but incremental adaptation; institutionalized discretion—supervisory judgment embedded in an institutional structure—has defined U.S. banking oversight.

Supervision architecture traced from the Office of the Comptroller of the Currency to the Federal Reserve, Federal Deposit Insurance Corporation, and state regulators.
Development described as institutionalized discretion and layering: each crisis, reform, and political compromise added new layers of authority and responsibility rather than a single, deliberate design.

Enables supervisors to respond to emerging risks and tailor interventions to institution-specific conditions.
Allows interpretation of evolving norms and practices while remaining accountable to democratic authority.
Enhances legitimacy of policy: discretion is characterized as not arbitrary but grounded in transparency and politically supported institutions.
Supports both financial stability and market dynamism.

Market structure and technology changes challenge the model:
- Growing share of financial intermediation migrated beyond regulated banking to nonbank financial institutions (NBFIs): asset managers, pension funds, insurance companies, private equity and credit funds, fintech lenders, and others.
- Banks remain providers of liquidity, credit, and fee-based services to NBFIs, linking traditional and nonbank sectors.
- Fragmentation of regulatory and supervisory agencies compounds supervisory challenges.
Federal Reserve’s expanded crisis-management role has drawn the central bank deeper into financial markets over the past two decades, including:
- Backstopping markets during the 2008 global financial crisis
- Emergency interventions during COVID-19
- Emergency interventions during the 2023 regional banking stress
Emerging vulnerabilities highlighted:
- Fast-moving global financial flows
- Rise of digital finance
- Data gaps in the NBFI world that make it difficult to monitor migration of risks beyond the traditional supervisory and regulatory perimeter
- Rapid growth of private credit illustrating tension between innovation, market structure evolution, and current supervisory approach
Risk: Without better data, discretion could become guesswork.

Key policy question posed: Is institutionalized discretion enough in an era of bank disintermediation, digital finance, and global capital mobility?
Potential areas for rethinking:
- Rethink the supervisory and regulatory perimeter
- Expand the supervisory tool kit
- Clarify policy objectives
Historical insight: Effective oversight depends on both the wisdom of discretion and the strength of institutions that wield it.

Reviewed book: Private Finance, Public Power: A History of Bank Supervision in America
- Authors: Peter Conti-Brown and Sean H. Vanatta
- Publisher: Princeton University Press
- Princeton, NJ, 2025, 424 pp., $39.95
Author affiliations noted in review:
- Peter Conti-Brown: associate professor of financial regulation at the University of Pennsylvania’s Wharton School
- Sean H. Vanatta: lecturer in financial history at the University of Glasgow

The Discretion Dilemma
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