## The Discretion Dilemma

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**Canonical URL:** [The Discretion Dilemma](https://www.imf.org/en/publications/fandd/issues/2025/12/book-review-the-discretion-dilemma-fabio-natalucci)

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## Bibliographic details
- Authors: FABIO NATALUCCI
- Published: November 18, 2025

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### Overview
- Author: FABIO NATALUCCI
- Publication: F&D Magazine
- Date: December 2025
- Read time indicator on page: Less than a minute(0 words) Read
- 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.

### Historical evolution of U.S. bank supervision
- 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.

### Strengths of institutionalized discretion
- 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.

### Limits and emerging vulnerabilities
- 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.

### Policy implications and questions
- 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.

### Key publication details
- 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

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## Content in this bundle

- **The Discretion Dilemma**
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_Source: https://www.imf.org/en/publications/fandd/issues/2025/12/book-review-the-discretion-dilemma-fabio-natalucci_