Kim Pernell-Gallagher — Institutional Corruption and Banking Regulation

The April 3, 2013 Lab seminar was presented by Kim Pernell-Gallagher, PhD candidate in the Sociology Department at Harvard University, Canada Program research fellow at Harvard's Weatherhead Center for International Affairs, and Edmond J Safra Lab Fellow. Kim studies the social causes of financial crisis and financial market regulation. Her previous research examines the organizational processes that drove U.S. banks and investment banks to underwrite collateralized debt obligations (CDOs) between 1996 and 2007. During her fellowship year, she will investigate the evolution of banking regulation, 1988-2006, in three countries that experienced different outcomes during the global financial crisis: Spain, Canada, and the United States. For her Lab seminar presentation, Kim described her research project at length, shared necessary contextual information relating to international banking, and outlined her preliminary findings about the divergent development of a specific regulatory policy.

Kim began the Lab seminar by introducing a basic premise of her presentation: banks from different countries were subject to different regulatory standards leading up to the recent global financial crisis. These policy differences had implications for the stability and solvency of banks during the crisis. Through identifying the causes of cross-national policy divergence in banking regulation, Kim believes it will tell us something about the causes of institutional corruption in the United States. Paramount to Kim's project is her examination of the Basel Capital Accord of 1988. Formed after the liberalization of financial markets in the 1970s, the Basel Accord established the first common baseline standard for minimum capital adequacy standards among international banks. Thus, the intended goals of the Basel Committee were to strengthen the safety and soundness of the international banking system, and create a level international playing field. Therefore, the cross-national policy divergence among Basel member countries Spain, Canada, and the United States is particularly puzzling, because it occurred during an era of unprecedented regulatory convergence. Kim defined cross-national policy divergence as the differences in interpretation and implementation of the Basel Accord. Her project focuses on tracing the divergent evolution of three regulatory policies: loan loss provisions, securitization, and the definition of a "bank" across three Basel Committee member countries, from 1988-2006.

Continuing with her preliminary findings, Kim expressed doubt that regulatory capture is responsible for the policy divergences found between the United States, Spain, and Canada. She instead argued that different logics or collective understandings about sources of economic order might influence the development of differing international regulatory policies. Such logics would explain how legislators and regulators perceive the causes of excessive risk taking, the sources of growth and competitiveness, the appropriate role for regulators in the market, and motives of bank managers. Though her project is ongoing, Kim questioned whether her case is actually a case of institutional corruption. This sparked debate about the definition of institutional corruption among participants, which included discussion of whether ideology might serve as a source of corrupting influence. At this point in the seminar, Lab participants began to discuss the impact that the FDIC might have on banking regulation in the United States. Another Lab participant was eager to comment that Kim should examine the different systems of bank ownership structures that exist in these countries and incorporate them into her research. He reasoned that because the banking ownership structures differ, that policy regulating them will most likely differ as well. Finally, one participant of the Lab expressed the need to investigate executive compensation. She argued that the values and ideologies being transmitted to the structure of executive compensation might reveal more corruption in this story.