The Causes of the Divergent Development of Banking Regulation in the U.S., Canada, and Spain The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters Citation Pernell, Kimberly Elizabeth. 2016. The Causes of the Divergent Development of Banking Regulation in the U.S., Canada, and Spain. Doctoral dissertation, Harvard University, Graduate School of Arts & Sciences. Citable link http://nrs.harvard.edu/urn-3:HUL.InstRepos:33493457 Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of- use#LAA The Causes of the Divergent Development of Banking Regulation in the U.S., Canada, and Spain A dissertation presented by Kimberly Elizabeth Pernell to The Department of Sociology in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the subject of Sociology Harvard University Cambridge, Massachusetts April 2016 © 2016 - Kimberly Elizabeth Pernell All rights reserved. Dissertation Advisor: Professor Frank Dobbin Kimberly Elizabeth Pernell The Causes of the Divergent Development of Banking Regulation in the U.S., Canada, and Spain Abstract Why did different countries create different systems of banking regulation in the years leading up to the recent global financial crisis, despite adhering to the same transnational regulatory agreement, the 1988 Basel Capital Accord? Using over 5000 pages of archival material and in- depth interviews with regulators and industry participants, I answer this question by tracing the historical development of banking regulation (1780-2007) across three countries that were all parties to the Basel Capital Accord: the U.S., Canada, and Spain. The conventional wisdom is that banking regulation either follows universal principles of efficiency or reflects the power and interests of the regulated industry. I offer a very different explanation: that regulators from different countries adopted different policies because they subscribed to fundamentally different conceptions of economic order, which can be traced back many decades in each country. iii Table of Contents Acknowledgements…………………….………………….………………….…………………...v Chapter 1: Introduction……………………………………………………………………………1 Chapter 2: The Institutional Roots of Banking Regulation……………………………………...48 Chapter 3: National Responses to the Banking Crises of the 1920s and 1930s………………..106 Chapter 4: Financial Deregulation in the U.S., Canada, and Spain…………………………….147 Chapter 5: The Crises of the 1980s and New Frames of Regulatory Order……………………184 Chapter 6: The Divergent Development of Banking Regulation in the Post-Basel Era………..220 Chapter 7: Conclusion…………………………………………………………………………..332 Works Cited……….……………………………………………………………………………352 Appendix A: Methodological Appendix………………………………………………………..372 iv Acknowledgements This dissertation would not have been possible without the encouragement, support, and input of many people. Above all, I thank the regulators, bankers, and accounting standards-setters who agreed to speak with me in Madrid, Ottawa, Toronto, and Washington D.C. in 2013 and 2014. These individuals welcomed a stranger into their offices and even into their homes, and gave me a great deal of their time and attention. It is easy to second-guess regulation from the sidelines, but it is much harder to be the one making the decisions, and I have a great deal of respect for the difficult (and often thankless) job that these regulators perform. I could not have asked for a better dissertation committee. My advisor, Frank Dobbin, was the epitome of an outstanding mentor. He has given me so much of his time, attention, and patience (I cringe sometimes when I think about how much patience!), and his careful feedback has pushed me to the limits of what I thought I was capable of, and then beyond. I will always be grateful to him for giving me the freedom to do exactly what I wanted to do, but never letting me off the hook with anything but my very best work. Jason Beckfield has also been there from the very start, consistently offering brilliant feedback, encouragement, and an uncanny ability to translate all of the informal rules of academia into something that made sense to me. My time at Harvard was much better for having known him, and I know I’m not alone in that feeling. Michèle Lamont, despite a full roster of her own advisees and a total lack of interest in banking regulation, was always an engaged, incisive, and supportive committee member, and I am very grateful for all of the time and energy she has spent on me. Finally, I sincerely thank David Scharfstein for agreeing to sign onto my dissertation committee at the eleventh hour, despite his own extremely busy schedule. I am also grateful to other Harvard faculty for offering feedback and support at crucial points along the way, especially Filiz Garip, Chris Marquis, David Ager, Bruce Western, and Jocelyn Viterna. Sofia Pérez at Boston University was kind enough to put me in contact with respondents in Spain and to talk with me about this project when I was just getting started. This research was funded by generous grants from the Weatherhead Center for International Affairs (the Canada Program and the Graduate Student Associates Program), the Tobin Project, and the National Science Foundation (Doctoral Dissertation Improvement Grant SES-1301627). I am especially thankful for the generous financial support I received from the Research Lab for Institutional Corruption at Harvard’s Edmond J. Safra Center for Ethics. I thank Larry Lessig, the former director of the Edmond J. Safra Center, for both believing in this project and for pushing me on crucial parts of the argument. I am massively indebted to my fellow graduate students. In my early years here at Harvard, the more advanced graduate students in the FMF research group, especially András Tilcsik, Eunmi Mun, Jiwook Jung, Soohan Kim, Shawna Vican, Sameer Srivastava, and Dan Schrage, took me under their wing and helped me to push my work forward at a time when I really needed all the help I could get. The second generation of the same group has also been an important source of feedback (and friendship), especially Carly Knight, Carl Gershenson, Allie Feldberg, Curtis Chan, Nate Wilmers, Barbara Kiviat, Gru Han, Kwan Woo Kim, Laura Adler, and LT Zhang. Carl and Carly, especially, have played a huge role in the development of this project, and there are few opinions I trust more than theirs. I also want to thank Journal Club and its members (Ann v Owens, Chris Muller, Caitlin Daniel, Deirdre Bloome, Vaughn Tan, and Dan Schrage), for their intellectual engagement and friendship. Dan, especially, knows that I owe him so much more than I could ever express in a thousand dissertation acknowledgement sections. Kevin Lewis and Chana Teeger have also been incredible friends and supporters, as have Jeremy Levine, Tony Jack, Ben Sousnaud, Kristin Perkins (who set the records for practice job talks attended and trivia games won); Eva Rosen (who turned out to be an even cooler “cool Eva” than I could have imagined); and Tracey Shollenberger (who was a constant source of great advice, in addition to being a true friend). I am also grateful to the staff at Harvard for all of their assistance, especially Dotty Lukas, Nancy Branco, Jessica Matteson, Suzanne Ogungbadero, Laura Kistler, Genevieve Butler, and Kristen Halbert. Laura Thomas somehow forgave me for being totally incompetent at scheduling interviews and went on to become one of my biggest supporters and a good friend, and I will miss her very much. Finally, I was lucky enough to meet three postdocs towards the end of my time here, Jen Heerwig, Adam Goldstein, and Rourke O’Brien, who made both my work and my social life better. I will always be grateful to my professors at Beloit College for their guidance and encouragement, especially Kate Linnenberg (who has been a wonderful mentor over the years) and Charles Westerberg (who sparked my sociological imagination in the first place). I only hope that I can be half as good to my students one day as they have been to me. Four Beloit friends, Ruth Hamilton, Eva Crawford, Lesley Craig, and Tom McHale (plus Oliver Sellers- Garcia), have really gone above and beyond, sitting through talks, reading drafts, and cheering me along to the finish line. I thank Jeff Matrician, Kourtney Lockwood, and Lindsey Troilo for getting me into the physical shape to write this. My parents and sister (Karen, Dave, and Mallory Pernell) have supported me every step of the way through this whole long process, and I know that I am very lucky to have their love and encouragement. My husband, Jack Gallagher, moved to Cambridge with me in 2007 without any idea of what we were getting into, and stuck by my side through all of the many ups and downs of graduate school. I thank him for his support, his feedback, his patience, and for always trusting that I could do it even when I wasn’t sure I could. I am also grateful for the support of my in-laws, Karen Lemke and Stephen Gallagher. The final acknowledgement is reserved for my brilliant friend and colleague Eleni Arzoglou, who has been my biggest cheerleader since day one. She had a hand in every important moment in the development of this project, and she never failed to believe in its promise (even when I had my doubts). I could have never done it without her, and I dedicate this dissertation to her. vi CHAPTER 1: INTRODUCTION We live in an increasingly global world. Over the past four decades, the world has witnessed a dramatic intensification in international trade, a marked increase in the mobility of capital, and the rapid and widespread circulation of new ideas and new technology.