Transatlantic Financial Regulation: US-EU Cooperation During the 2008 Financial Crisis 3030748545, 9783030748548

Table of contents :
Preface
Contents
List of Figures
List of Tables
Abbreviations
Chapter 1: Introduction and Framework
Significance of Transatlantic Financial Regulatory Cooperation as a Topic
The Aim of This Book
Scope of This Book
Focus on the Global Financial Crisis Period
Structure of This Book
Theoretical Contributions to the Topic
The Intergovernmental Relationship
Transatlantic Interdependence
Conceptualizing Transgovernmental
The Turn Towards Governance
A Transatlantic Governance?
A Focus on Financial Markets Regulatory Cooperation
International Financial Governance Literature
Norms, Values, Principles and Standards
GFC Literature
Conclusion
Chapter 2: Background to Transatlantic Relations
Historical Context
US Support for Ongoing European Integration
Emergence of Supranational Europe
The Changing Trade Relationship
Towards European Monetary Independence
US-EU Economic Interdependence
Origins of a Bilateral Financial Markets Relationship
A US “Seat at the Table” of EU Rulemaking
The Emergence of Financial Markets Regulatory Cooperation
Financial Services Action Plan
Formalizing Financial Regulatory Cooperation: FMRD 2002
Economic and Financial Interdependence at Outset of the Financial Crisis
Conclusion
Chapter 3: The US-EU Bilateral Intergovernmental Relationship
Transatlantic Intergovernmental Actors
Historical Context
The Challenge to Intergovernmentalism
Forms of Cooperation: Formal Agreements
US Relations with Supranational Europe
A New Euro-Atlantic Architecture
US-EU Divergence
The New Transatlantic Agenda of 1995
The Impending Introduction of the Euro
The Transatlantic Economic Partnership in 1998
Financial Markets Moves Onto the Political Agenda in the 1990s
Specific Areas of Cooperation Under the Intergovernmental Agreement in 2005
Changing Patterns in Intergovernmental Cooperation
Intergovernmental Patterns: Analysis
Intensified Cooperation and the Global Financial Crisis
Financial Markets as an Intergovernmental Concern
Conclusion
Chapter 4: US-EU Cooperation in the G20 at the Outset of the Global Financial Crisis
Background to the Financial Crisis
The Transatlantic Dimension
The Turning Point
European Push for Global Help
European Help for the US Bailout Plan
The G7/8 and the Global Solution
European Disjointed Coordination
The Rise of the Eurogroup
US and European Bailout Moves
The European Push for a Summit and the G7
The G7 as a Steering Committee for the G20
Eurogroup as Steering Committee for the EU
The US Agrees to a G20 Summit
The G20’s Genesis
Summit Preparations and the US-EU Agenda
The First G20 Leaders’ Summit
The Washington Summit Outcome
A Role for the IMF
The Agenda-Setting Advantage
Choice of Forum
Time Horizons
Conclusion
Chapter 5: The Role of Transgovernmental and Transnational Dialogue in Financial Markets Cooperation
Conceptualizing Transgovernmental
Historical Context
The Emergence of Financial Regulatory Networks
Bilateral Financial Markets Regulatory Cooperation
Bilateral Securities Cooperation
Diverging Patterns by Sector
Shift of Influence Towards ECB
Reasons for the Development of Bilateral Financial Relations
Forms of Regulatory Cooperation at Transgovernmental Level
Information Exchanges and Dialogues
Informal Agreements
National Treatment
Mutual Recognition Agreements
Regulatory Equivalence
Harmonization
Development of Other Formal Regulatory Cooperation
Institutionalization of Financial Regulatory Cooperation
SEC Outreach Strategy
Managing Financial Regulatory “Spillover”
European Interests
The High-Level Regulatory Cooperation Forum
A Strategy of Mutual Engagement
Intensified Regulatory Cooperation During the GFC
“A Constant Dialogue at Working Level”
Financial Stability Issues and the ECB
Conclusion
Chapter 6: Case Studies in Multilevel US-EU Policy Coordination: Credit Ratings Agencies, Accounting Standards and Credit Default Swaps Reform
CASE STUDY 1: Credit Ratings Agencies Reform
Reforms in Progress Prior to GFC
A US-EU Divergence
Concerns over EU Proposals
The US Positions Itself at the G20
EU Credit Ratings Legislation
Regulatory Equivalence Regime
European Concern over US Plans
The European Securities and Markets Authority Gains Responsibility
Conclusion: Two Regulatory Regimes Instead of One
CASE STUDY 2: Accounting Standards Convergence
Emergence of a European Approach
US-EU Divergence
Towards a Common Standard
SEC Concessions
The SEC Roadmap Towards Convergence
Progress at a Standstill with Huge Standards Gaps
Reform After the G20 Summit
US-EU Compromise and Towards Convergence
CASE STUDY 3: Credit Default Swaps Reform
CDS “Virtually Unregulated”
US Moves to Direct CDSs through Clearinghouses
The EU Acts on Credit Default Swaps
The US Makes CDSs Top Priority
The G20 Washington Summit Agenda
ECB Consultation
The Obama Administration’s Proposals
Pittsburgh Tackles OTC Derivatives
Conclusion
Chapter 7: The US-EU Relationship in International Forums
Who Comprises Global Financial Governance
Evolution of the US and the EU Global Financial Markets Relationship
US-European Dominated Organisations
The US and Global Securities
Other Bodies
A Defacto US-European Alliance
A Deliberative Alliance
Control and Management of IFIs
The Power of Hegemony in Shaping Convergence
Agenda-Setting
A Strategy of Active Engagement
Norms, Values, Standards and Principles
Status Quo Push-Back
The Enforcement of Global Rules
Coercion as Enforcement
Problematization
An Intensification of Cooperation During the Global Financial Crisis
Early Coordination of US and EU Respective Agendas
The Trade-off
Broadening the International Governance Base
US and EU Led Reforms
Largely Pre-determined Outcomes London G20 Summit
High Hopes but More of the Same
The Maintenance of an Opt-Out
Conclusion
Chapter 8: US-EU Cooperation on a Role for the International Monetary Fund
A History of US-EU Dominance
US-European Power Balance
“Some Minor Influence from Europe”
US Veto over Major Decisions
Europe at the IMF
US and European Claims Over the Top Job
The IMF’s Waning Role
The IMF’s Ebb and Flow
A Manifestation of US-EU Dominance
The Solution: A US Led Decision
Efforts to Broaden the Funding Base: Drumming up Support
G20 Agrees on a New Lease of Life for the IMF
US Interests in the IMF, Geopolitical and Financial
Securing US Private Interests
US International Lending Benefits
European Interests
EU Banking Interests in Europe
Domestic Considerations
EU States the Biggest Recipients of IMF Lending
The EU’s Political Interest
Securing Key Member State Interests
Conclusion
Chapter 9: Conclusion
Key Findings
Transatlantic Cooperative Patterns
International Dimension
A Defacto US-EU Alliance
Significance of Findings
Limitations
Further Questions
Bibliography
Academic Literature, Books, Journal Articles, Papers
Databases
Legislation
Letters
Media
Press Releases, Declarations, Official Statements
Reports, Working Papers, Policy Briefs
Speeches, Testimony
Submissions, Presentations
Websites
Index

Citation preview

Peter O’Shea

Transatlantic Financial Regulation US-EU Cooperation During the 2008 Financial Crisis

Transatlantic Financial Regulation

Peter O’Shea

Transatlantic Financial Regulation US-EU Cooperation During the 2008 Financial Crisis

Peter O’Shea Captcha Media Paris, France

ISBN 978-3-030-74854-8    ISBN 978-3-030-74855-5 (eBook) https://doi.org/10.1007/978-3-030-74855-5 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

Transatlantic financial regulatory cooperation is a topic that has like most scholarly topics been afforded varying attention by scholars at different times, depending on the political events at the time. It was given significant attention in the 1990s, at a time when the EU was rolling out an extensive financial markets legislative program and the US was implementing its own legislative reforms in response to corporate scandals. This was a period in which both EU and US financial institutions had increased concerns over access to each other’s markets and at a time when successive transatlantic intergovernmental agreements had inspired scholarly debate. Scholarly interest in the transatlantic relationship lapsed somewhat until the global financial crisis in 2008–2009, during which the US and the EU drove extensive regulatory reform through the G20 process that led to far-reaching reforms throughout the global financial system. This inspired further examination of the effects of the crisis and the political implications for the global economy. This book is the result of research conducted during my doctoral studies from 2012 to 2016, with the incorporation of additional research conducted since. During the financial crisis, I was drawn to the manner in which the US and the EU seemed to act in concert to drive a speedy response. I was also interested in the politics of the response. US and EU leaders began calling very loudly for radical reform. French President Nicolas Sarkozy, whose country held the EU presidency at the time, called for a new “regulated capitalism”, one in which “entire swathes of financial activity are not left to the sole judgement of market operators”1. This reflected considerable consternation, even anger, in Europe at what was seen as an American problem. Subsequently, President George W. Bush also pledged to repair what he said was a broken global regulatory framework. “Our twenty-first-century global economy remains regulated largely by outdated twentieth-century laws”, he said2.

1  General Assembly Sixty-third session 5th plenary meeting, 23 September 2008, United Nations, New York. 2  “President Bush’s Speech to the Nation on the Economic Crisis”. 2008. The New York Times, September 24.

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Very quickly US and EU leaders declared the crisis a “global” one. The G20 Leaders’ Summit in London in April 2009 famously pronounced that “a global crisis” required a “global solution”3. However, at that stage at least, it seemed to be a crisis that mostly affected the US and Europe. Financial market losses that originated in the US real estate market 18 months earlier and then affected Europe had not translated into banking collapse and credit crisis paralysis outside of the US and Europe. Clearly, the scale of the problems and the collapse of huge banks like US investment bank Bear Sterns created a crisis of confidence in world markets. There were also obvious global implications around financial stability. As US President Bush noted, keeping markets operating had been “especially urgent”4. However, was the involvement of the G20 and the roll-out of extensive financial markets regulatory reform throughout world markets really necessary? Whose interests were being protected by such a response? President Bush’s comment had raised hopes there would be radical reform of the global financial system, notably in a way that would improve the democratic base of the US and European-dominated system of international financial governance. Several years after the worst of the crisis, there had been significant regulatory reform throughout the transatlantic economy and the world, but there had been no radical reform of the “system” as many had demanded and leaders had pledged. As US and European leadership had taken responsibility for reforming financial governance, and there being no major change to the system of governance, I was drawn to questions as to why not. I was drawn as to why a seemingly US-European problem required a global regulatory response, beyond maintaining financial stability and market confidence. Notably there seemed to be a close US-EU alliance in steering the solution to the crisis. That the US and the EU worked closely on finding a solution to a major crisis is not new. However, the degree to which a de facto US-EU alliance makes and shapes global financial governance itself is a question that requires further exploration. This book aims to explore this question so far as financial markets regulatory cooperation is concerned. It is the result of extensive research and draws upon interviews conducted with policymakers in the US and the EU who had been involved in transatlantic financial markets regulatory cooperation at the time and several years earlier at the height of the global financial crisis. It explores how the relationship operates on a bilateral basis and US-EU cooperation in multilateral financial institutions and fora. In doing so, it brings together a number of arguments as they relate to the transatlantic context. While discussing the topic broadly, it focuses on cooperation during the financial crisis as it was a period of particularly intense dialogue on financial markets reform. In doing so, it aims to contribute to literature on 3  G20. 2009. “Declaration on Strengthening the Financial System (Annex to London Summit Communiqué)”, London, 2 April; US Treasury. 2009. “Prepared Statement by Treasury Secretary Tim Geithner at the G-20 Finance Ministers and Central Bank Governors Meeting”, Horsham, UK, 14 March. 4  Council on Foreign Relations. 2008. “Bush’s Speech on the Economic Crisis” to Manhattan Institute, New York, November 2008.

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transatlantic relations, regulatory cooperation, and financial markets regulation and answer some of the questions that have not yet been fully explored elsewhere. Paris, France

Peter O’Shea

Contents

1 Introduction and Framework ����������������������������������������������������������������    1 Significance of Transatlantic Financial Regulatory Cooperation as a Topic ������������������������������������������������������������������������������������������������     2 The Aim of This Book ����������������������������������������������������������������������������     5 Scope of This Book����������������������������������������������������������������������������������     6 Focus on the Global Financial Crisis Period��������������������������������������������     8 Structure of This Book����������������������������������������������������������������������������     9 Theoretical Contributions to the Topic����������������������������������������������������    10 The Intergovernmental Relationship��������������������������������������������������������    12 Transatlantic Interdependence ����������������������������������������������������������������    14 Conceptualizing Transgovernmental��������������������������������������������������������    16 The Turn Towards Governance����������������������������������������������������������������    18 A Transatlantic Governance? ������������������������������������������������������������������    20 A Focus on Financial Markets Regulatory Cooperation��������������������������    21 International Financial Governance Literature����������������������������������������    23 Norms, Values, Principles and Standards������������������������������������������������    24 GFC Literature ����������������������������������������������������������������������������������������    25 Conclusion ����������������������������������������������������������������������������������������������    26 2 Background to Transatlantic Relations ������������������������������������������������   29 Historical Context������������������������������������������������������������������������������������    30 US Support for Ongoing European Integration ��������������������������������������    31 Emergence of Supranational Europe�������������������������������������������������������    32 The Changing Trade Relationship ����������������������������������������������������������    34 Towards European Monetary Independence��������������������������������������������    35 US-EU Economic Interdependence ��������������������������������������������������������    37 Origins of a Bilateral Financial Markets Relationship����������������������������    38 A US “Seat at the Table” of EU Rulemaking������������������������������������������    40 The Emergence of Financial Markets Regulatory Cooperation��������������    41 Financial Services Action Plan����������������������������������������������������������������    43 Formalizing Financial Regulatory Cooperation: FMRD 2002����������������    44 ix

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Economic and Financial Interdependence at Outset of the Financial Crisis������������������������������������������������������������������������������    46 Conclusion ����������������������������������������������������������������������������������������������    48 3 The US-EU Bilateral Intergovernmental Relationship������������������������   51 Transatlantic Intergovernmental Actors ��������������������������������������������������    52 Historical Context������������������������������������������������������������������������������������    53 The Challenge to Intergovernmentalism��������������������������������������������������    54 Forms of Cooperation: Formal Agreements��������������������������������������������    55 US Relations with Supranational Europe������������������������������������������������    56 A New Euro-Atlantic Architecture����������������������������������������������������������    57 US-EU Divergence����������������������������������������������������������������������������������    59 The New Transatlantic Agenda of 1995��������������������������������������������������    60 The Impending Introduction of the Euro ������������������������������������������������    62 The Transatlantic Economic Partnership in 1998������������������������������������    63 Financial Markets Moves Onto the Political Agenda in the 1990s����������    64 Specific Areas of Cooperation Under the Intergovernmental Agreement in 2005����������������������������������������������������������������������������������    65 Changing Patterns in Intergovernmental Cooperation����������������������������    66 Intergovernmental Patterns: Analysis������������������������������������������������������    67 Intensified Cooperation and the Global Financial Crisis ������������������������    71 Financial Markets as an Intergovernmental Concern������������������������������    72 Conclusion ����������������������������������������������������������������������������������������������    74 4 US-EU Cooperation in the G20 at the Outset of the Global Financial Crisis ����������������������������������������������������������������   77 Background to the Financial Crisis����������������������������������������������������������    78 The Transatlantic Dimension ������������������������������������������������������������������    79 The Turning Point������������������������������������������������������������������������������������    80 European Push for Global Help ��������������������������������������������������������������    81 European Help for the US Bailout Plan��������������������������������������������������    82 The G7/8 and the Global Solution ����������������������������������������������������������    83 European Disjointed Coordination����������������������������������������������������������    84 The Rise of the Eurogroup����������������������������������������������������������������������    85 US and European Bailout Moves������������������������������������������������������������    86 The European Push for a Summit and the G7������������������������������������������    88 The G7 as a Steering Committee for the G20������������������������������������������    90 Eurogroup as Steering Committee for the EU ����������������������������������������    90 The US Agrees to a G20 Summit������������������������������������������������������������    91 The G20’s Genesis ����������������������������������������������������������������������������������    92 Summit Preparations and the US-EU Agenda ����������������������������������������    94 The First G20 Leaders’ Summit��������������������������������������������������������������    95 The Washington Summit Outcome����������������������������������������������������������    96 A Role for the IMF����������������������������������������������������������������������������������    99 The Agenda-Setting Advantage ��������������������������������������������������������������   100 Choice of Forum��������������������������������������������������������������������������������������   100

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Time Horizons������������������������������������������������������������������������������������������   101 Conclusion ����������������������������������������������������������������������������������������������   102 5 The Role of Transgovernmental and Transnational Dialogue in Financial Markets Cooperation ����������������������������������������  103 Conceptualizing Transgovernmental��������������������������������������������������������   104 Historical Context������������������������������������������������������������������������������������   105 The Emergence of Financial Regulatory Networks ��������������������������������   107 Bilateral Financial Markets Regulatory Cooperation������������������������������   108 Bilateral Securities Cooperation��������������������������������������������������������������   109 Diverging Patterns by Sector�������������������������������������������������������������������   111 Shift of Influence Towards ECB��������������������������������������������������������������   112 Reasons for the Development of Bilateral Financial Relations ��������������   113 Forms of Regulatory Cooperation at Transgovernmental Level��������������   115 Information Exchanges and Dialogues����������������������������������������������������   116 Informal Agreements ������������������������������������������������������������������������������   117 National Treatment����������������������������������������������������������������������������������   118 Mutual Recognition Agreements ������������������������������������������������������������   118 Regulatory Equivalence ��������������������������������������������������������������������������   120 Harmonization������������������������������������������������������������������������������������������   122 Development of Other Formal Regulatory Cooperation��������������������������   122 Institutionalization of Financial Regulatory Cooperation������������������������   123 SEC Outreach Strategy����������������������������������������������������������������������������   124 Managing Financial Regulatory “Spillover”��������������������������������������������   125 European Interests������������������������������������������������������������������������������������   126 The High-Level Regulatory Cooperation Forum ������������������������������������   127 A Strategy of Mutual Engagement����������������������������������������������������������   128 Intensified Regulatory Cooperation During the GFC������������������������������   129 “A Constant Dialogue at Working Level”������������������������������������������������   130 Financial Stability Issues and the ECB����������������������������������������������������   131 Conclusion ����������������������������������������������������������������������������������������������   132 6 Case Studies in Multilevel US-EU Policy Coordination: Credit Ratings Agencies, Accounting Standards and Credit Default Swaps Reform ����������������������������������������������������������������������������  133 CASE STUDY 1: Credit Ratings Agencies Reform��������������������������������   133 Reforms in Progress Prior to GFC ����������������������������������������������������������   135 A US-EU Divergence������������������������������������������������������������������������������   135 Concerns over EU Proposals��������������������������������������������������������������������   136 The US Positions Itself at the G20����������������������������������������������������������   138 EU Credit Ratings Legislation ����������������������������������������������������������������   139 Regulatory Equivalence Regime��������������������������������������������������������������   141 European Concern over US Plans������������������������������������������������������������   142 The European Securities and Markets Authority Gains Responsibility��   143 Conclusion: Two Regulatory Regimes Instead of One����������������������������   144

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CASE STUDY 2: Accounting Standards Convergence ��������������������������   145 Emergence of a European Approach��������������������������������������������������������   146 US-EU Divergence����������������������������������������������������������������������������������   147 Towards a Common Standard������������������������������������������������������������������   148 SEC Concessions ������������������������������������������������������������������������������������   149 The SEC Roadmap Towards Convergence����������������������������������������������   150 Progress at a Standstill with Huge Standards Gaps ��������������������������������   152 Reform After the G20 Summit����������������������������������������������������������������   152 US-EU Compromise and Towards Convergence ������������������������������������   153 CASE STUDY 3: Credit Default Swaps Reform������������������������������������   154 CDS “Virtually Unregulated”������������������������������������������������������������������   155 US Moves to Direct CDSs through Clearinghouses��������������������������������   157 The EU Acts on Credit Default Swaps����������������������������������������������������   158 The US Makes CDSs Top Priority ����������������������������������������������������������   159 The G20 Washington Summit Agenda����������������������������������������������������   160 ECB Consultation������������������������������������������������������������������������������������   162 The Obama Administration’s Proposals��������������������������������������������������   163 Pittsburgh Tackles OTC Derivatives��������������������������������������������������������   165 Conclusion ����������������������������������������������������������������������������������������������   166 7 The US-EU Relationship in International Forums ������������������������������  167 Who Comprises Global Financial Governance����������������������������������������   168 Evolution of the US and the EU Global Financial Markets Relationship ��������������������������������������������������������������������������������������������   169 US-European Dominated Organisations��������������������������������������������������   170 The US and Global Securities������������������������������������������������������������������   171 Other Bodies��������������������������������������������������������������������������������������������   172 A Defacto US-European Alliance������������������������������������������������������������   173 A Deliberative Alliance����������������������������������������������������������������������������   176 Control and Management of IFIs������������������������������������������������������������   177 The Power of Hegemony in Shaping Convergence ��������������������������������   179 Agenda-Setting����������������������������������������������������������������������������������������   180 A Strategy of Active Engagement������������������������������������������������������������   181 Norms, Values, Standards and Principles������������������������������������������������   183 Status Quo Push-Back������������������������������������������������������������������������������   185 The Enforcement of Global Rules ����������������������������������������������������������   186 Coercion as Enforcement������������������������������������������������������������������������   188 Problematization��������������������������������������������������������������������������������������   189 An Intensification of Cooperation During the Global Financial Crisis����������������������������������������������������������������������������������������   190 Early Coordination of US and EU Respective Agendas��������������������������   191 The Trade-off ������������������������������������������������������������������������������������������   192 Broadening the International Governance Base��������������������������������������   194 US and EU Led Reforms ������������������������������������������������������������������������   195 Largely Pre-determined Outcomes London G20 Summit ����������������������   197

Contents

xiii

High Hopes but More of the Same����������������������������������������������������������   198 The Maintenance of an Opt-Out��������������������������������������������������������������   199 Conclusion ����������������������������������������������������������������������������������������������   201 8 US-EU Cooperation on a Role for the International Monetary Fund����������������������������������������������������������������������������������������  203 A History of US-EU Dominance ������������������������������������������������������������   204 US-European Power Balance������������������������������������������������������������������   205 “Some Minor Influence from Europe”����������������������������������������������������   207 US Veto over Major Decisions����������������������������������������������������������������   209 Europe at the IMF������������������������������������������������������������������������������������   210 US and European Claims Over the Top Job��������������������������������������������   212 The IMF’s Waning Role��������������������������������������������������������������������������   213 The IMF’s Ebb and Flow ������������������������������������������������������������������������   214 A Manifestation of US-EU Dominance��������������������������������������������������   215 The Solution: A US Led Decision ����������������������������������������������������������   216 Efforts to Broaden the Funding Base: Drumming up Support����������������   217 G20 Agrees on a New Lease of Life for the IMF������������������������������������   219 US Interests in the IMF, Geopolitical and Financial��������������������������������   220 Securing US Private Interests������������������������������������������������������������������   222 US International Lending Benefits����������������������������������������������������������   224 European Interests������������������������������������������������������������������������������������   225 EU Banking Interests in Europe��������������������������������������������������������������   227 Domestic Considerations ������������������������������������������������������������������������   229 EU States the Biggest Recipients of IMF Lending����������������������������������   231 The EU’s Political Interest ����������������������������������������������������������������������   232 Securing Key Member State Interests������������������������������������������������������   233 Conclusion ����������������������������������������������������������������������������������������������   235 9 Conclusion������������������������������������������������������������������������������������������������  237 Key Findings��������������������������������������������������������������������������������������������   238 Transatlantic Cooperative Patterns����������������������������������������������������������   239 International Dimension��������������������������������������������������������������������������   240 A Defacto US-EU Alliance����������������������������������������������������������������������   241 Significance of Findings��������������������������������������������������������������������������   241 Limitations ����������������������������������������������������������������������������������������������   242 Further Questions������������������������������������������������������������������������������������   243 Bibliography ����������������������������������������������������������������������������������������������������  247 Index������������������������������������������������������������������������������������������������������������������  279

List of Figures

Fig. 4.1 Stimulus Measures in G20 Countries During the 2008/09 Crisis Fig. 4.2 Stimulus Measures by World Regions During the 2008/09 Crisis. (Source: International Labour Organization)

98 98

Fig. 6.1 The size of derivatives markets in 2008: on- and off-exchange. (Source: Bank for International Settlements (BIS) (European Commission. 2009. “Commission Staff Working Paper Accompanying the Commission Communication Ensuring Efficient, Safe and Sound Derivatives Markets”, WP 905 final, Brussels, July 2009) 156

xv

List of Tables

Table 1.1 Global, US, EU, China Gross Domestic Product (GDP), 2000–2019 (in current US$ trillion as of 2020)

4

Table 3.1 All US Presidential Trips to Europe from 1945 to 2021

68

Table 5.1 International Regulatory Cooperation Agreements used in the US-EU Context Table 5.2 Key informal US-EU bilateral financial-related agreements Table 5.3 Financial-Related EU Regulatory Equivalence Decisions Table 5.4 Other types of International Regulatory Cooperation agreements

115 117 121 123

Table 7.1 Chairs of the Basel Committee on Banking Supervision (BCSC) 178 Table 8.1 IMF Quota Formulas Table 8.2 IMF Executive Board directors by Group Table 8.3 German and French Banking Exposure to Sovereign Debt of Greece, Portugal, Spain, Ireland, Italy and Hungary vs. Domestic Banks’ Exposure in 2010 Table 8.4 Top Ten IMF loans in USD Value 2008 to 2011 Inclusive Table 8.5 IMF Signed Lending Agreements as of August 2013

208 209 229 231 233

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Abbreviations

BCBS BIS CDOs CDS CESR EBA ECB ECJ ECOFIN ESCB ECSC EEC EFSF EFSM EMDC EPU ESM ESMA ESRB FMRD FSB FSF FSIC G20 G8 GAAP GFC IAIS IASB IBRD IFRS

Basel Committee on Banking Supervision Bank for International Settlements Collateralised Debt Obligations Credit Default Swaps Committee of Securities Regulators European Banking Authority European Central Bank European Court of Justice Economic and Financial Affairs Council European System of Central Banks European Coal and Steel Community European Economic Community European Financial Stability Facility European Financial Stability Mechanism Emerging Market and Developing Economy European Payments Union European Stability Mechanism European Securities and Markets Authority European Systemic Risk Board Financial Markets Regulatory Dialogue Financial Stability Board Financial Stability Forum US Financial Stability Oversight Council Group of 20 Nations Group of 8 Nations Generally Accepted Accounting Practices Global Financial Crisis International Association of Insurance Supervisors International Accounting Standards Board International Bank for Reconstruction and Development International Financial Reporting Standards xix

xx

ISDA IMF IMFC INGO IOSCO MDBs NAFTA NATO NTA OECD OEEC OIA OMTs OTC PWGFM SCIMF SEC SDRs SGP TABD TACD TALD TEC TEP TEU TFEU TTIP

Abbreviations

International Swaps and Derivatives Association International Monetary Fund International Monetary and Financial Committee International Non-Governmental Organisation International Organization of Securities Commissions Multilateral Development Banks North American Free Trade Agreement North Atlantic Treaty Organization New Transatlantic Agenda Organisation for Economic Co-operation and Development Organisation for European Economic Co-operation US Office of International Affairs Outright Monetary Transactions Over the Counter Trading US President’s Working Group on Financial Markets Sub-Committee on IMF US Securities and Exchange Commission Special Drawing Rights Stability and Growth Pact Transatlantic Business Dialogue Transatlantic Consumer Dialogue Transatlantic Legislators Dialogue Transatlantic Economic Council Transatlantic Economic Partnership Treaty on European Union Treaty on the Functioning of the European Union Transatlantic Trade and Investment Partnership

Chapter 1

Introduction and Framework

Transatlantic financial regulatory cooperation is a topic of study that was virtually non-existent prior to the 1990s. Scholars had studied transatlantic relations since the WW2 and even earlier, but financial regulatory cooperation between the United States and the European Union and its supranational predecessors only emerged in parallel with the development of a comprehensive EU financial services policy capacity. Prior to WW2, international cooperation, including in the transatlantic relationship, involved heads of state discussion, negotiation and agreement, usually in the form of a treaty or other agreement. This changed dramatically in the postwar era, amid accelerating globalization, the proliferation of multinationals around the globe, consequent growth in international banking and finance, and an explosion in the number and types of other non-state actors. By the 1950s and 1960s, networks of bankers, officials from state regulators and specialist experts in the area of banking and financial markets had begun to form a web of policies and cooperative arrangements, giving rise to claims that the state as a unitary actor was disintegrating, to be replaced by non-state actors as the “new diplomats”.1 A pattern emerged, in which heads of state engaged in high-level political cooperation, with regulators and experts involving themselves in standards, best practice, information sharing, risk mitigation, cooperation on enforcement matters and the identification of cross-border problems. In addition, the proliferation of non-state private interests such as banks and financial institutions in policy making and shaping has expanded in recent decades. In short, regulators and private actors working together developed the detail. The growing role of regulators and private interests in policymaking gave rise to a characterization of the various levels of international cooperation as being:

1  Slaughter, Anne-Marie. 1997. “The Real New World Order”, Foreign Affairs, 76, No. 5, September/October.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_1

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• the intergovernmental level involved chiefs of government (or COGs) and other high-level officials negotiate on behalf of US and EU interests, as determined by internal domestic processes • the transgovernmental level, where lower-level domestic officials work with their transatlantic counterparts on specific issues to coordinate and harmonize domestic policies • the transnational level, where private actors, including business representatives and other constituents, coordinate efforts to advance their respective goals.2 Each of these, Pollack and Shafer noted, corresponded to a specific body of theory in international relations. However, greater globalization and the internationalization of standards designed to harmonize international financial regulation have led to a gradual intensification of cooperation between the US and the EU in multilateral fora as well. The US and EU interact at other levels than just bilateral level and indeed the transatlantic dimension is just one part of the broader international landscape of cooperation on a range of policy areas. This is an issue raised by scholars before, with Helleiner and Pagliari noting the need to devote greater attention to a wider set of international regulatory outcomes.3 Transatlantic cooperation on financial markets regulatory cooperation only truly emerged in the 1990s, continuing into the 2000s, as the EU’s single market program drove financial markets regulatory harmonization within the EU. The result was a progressively developing body of distinctly “European” financial markets rules and standards that rivaled the US in the international market. It was a body of rules that intensified market access and operational concerns in the US.  At the same time, legislative changes in the US were pitched against the emerging EU regime, creating challenges for EU firms as well. By this time, a picture emerged of an increasingly complex bilateral transatlantic relationship that involved heads of state, regulators and private actors, which intersected with an expanding international market which itself involved a greater number of actors.

 ignificance of Transatlantic Financial Regulatory S Cooperation as a Topic Given the size of the transatlantic economy and its effect on the world economy, transatlantic financial regulatory cooperation is an important topic for several reasons. Firstly, the size of the transatlantic market creates a dynamic that is complex and in which the modes of cooperation are highly developed and sophisticated. It is a highly active international policy making environment, where individual 2  Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 5. 3  Helleiner, Eric and Stefano Pagliari. 2011. The End of an Era in International Financial Regulation? A Postcrisis Research Agenda, International Organization 65, Winter 2011: 169–200.

Significance of Transatlantic Financial Regulatory Cooperation as a Topic

3

issue-areas are numerous and themselves highly complex and often technical. The level of cooperation on financial markets regulatory policy is highly institutionalized in the sense that it is framed by numerous high-level international agreements and numerous dialogues at transgovernmental level. An examination of the transatlantic relationship provides a window to best practice, shortcomings, failings, patterns of cooperation and drivers of financial regulation. As such, the transatlantic relationship provides countless opportunities to study a unique level of multilevel and multichannel policy making. Secondly, the level of financial markets interdependence between the US and the EU creates a particularly sticky relationship, one that cannot be severed so easily. The transatlantic economy generates $5.6 trillion in total commercial sales a year and employs up to 16 million workers in mutually “onshored” jobs in both markets.4 Combined, it accounts for half of the world’s personal consumption and almost one-­ third of global GDP in terms of purchasing power. As such, it is the world’s largest and wealthiest market. At the same time the US and the EU are critically important to each other; the US imported $515 billion worth of good from the EU in 2019, while the US exported worth of goods to the EU $337  billion.5 Further, the US engaged $312  billion worth of European services in 2018 and Europe engaged $236 billion worth of US services the same year. In terms of investment, 50% of global investment into the US came from Europe in 2019 and 61% of US global investment went to Europe in 2018.6 This level of interconnectedness creates dynamics that have a significant effect on global politics and international outcomes. Notably US-EU economic and political interdependence created a compelling reason for the US and EU to coordinate and cooperate closely to find a solution to the financial crisis in 2008–2009, as discussed in this book. Thirdly there is a high degree of interaction between transgovernmental as well as transnational actors. Interaction and policy formation between regulators on both sides of the Atlantic involves regulators in different industries, at different levels in their respective jurisdictions operating in often different value and normative frameworks. The evolution of the role regulators play is of critical importance to the study of policymaking as well as for issues of legitimacy, transparency and even risk management. It’s critical that policymaking processes are studied, understood and scrutinized and managed. The role of transnational actors, many of which are afforded significant opportunity to contribute to debate and solutions, come with vested interests that often conflict with state and civic interests. If one were to study for example the way in which regulatory authorities draw on the expertise of industry in the course of developing policy and the degree to which industry shapes policy, the US-EU relationship would be an ideal topic. Such dialogues are now highly institutionalized. 4  Hamilton, Daniel S. and Quinlan, Joseph P. 2020. The Transatlantic Economy 2020: Annual Survey of Jobs, Trade and Investment between the United States and Europe, US Chamber of Commerce and the American Chamber of Commerce to the EU. 5  Ibid. 6  Ibid.

4

1  Introduction and Framework Table 1.1  Global, US, EU, China Gross Domestic Product (GDP), 2000–2019 (in current US$ trillion as of 2020) 2019 US$ trillion percentage of global GDP World 87.80 EU 15.63 US 21.43 China 14.34 2000 World 33.62 EU 7.26 US 10.25 China 1.211

17.80% 24.41% 16.34%

21.59% 30.49% 3.60%

Source: World Bank

Additionally, transatlantic financial regulatory cooperation is of interest because of its significance to global financial governance. An examination of US-EU interests in the transatlantic economy and the size of their respective financial markets shapes priorities, sets the agenda, and lead outcomes in the rest of the world.7 This significance is fairly evident when one looks at the numbers. Around 20 years ago, the US was the world’s largest economy, generating 30.49% of global GDP.8 The EU was second, generating 22.59% and China third, generating just 3.6% of global GDP. This has changed dramatically. China has powered ahead and in 2019 comprised an enormous 16.34% of global GDP. However, US GDP comprised 24.41% of GDP in 2019 and the EU 17.80%. The fast rise of China, and indeed other emerging economies, in the world market over the last two decades has not been lost on either the US or the EU (Table 1.1). Acting together, the US and EU economies are by far the largest, comprising 42.21% of global GDP.  This is important because on many occasions, they do indeed act together. In the G20 for example, a forum in which decisions are made by consensus, the US and EU, the world’s largest economies, frequently act together. There are several arguments that offer plausible explanations, including explanations around financial interdependence, which are discussed later. The US and EU have acted together for decades in other fora and continue to do so. Take for example the US and the EU, or at least the EU member states, in the International Monetary Fund (IMF). In addition to the US and EU together dominating voting rights in the organization, the US and Europe have always maintained an unofficial claim over the IMF’s top job of managing director as well as the top position in the World Bank. As part of an unwritten agreement between the US and Europe, a European has always headed the IMF and an American the World Bank. All IMF managing directors since its establishment have been from a European 7  Drezner, Daniel W. 2007. All Politics is Global: Explaining International Regulatory Regimes, Princeton University Press, Princeton, New Jersey. 8  Databank, World Bank, databank.worldbank.org

The Aim of This Book

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state, including Kristalina Georgieva, from Bulgaria, the current managing director the time of writing. In fact, all have been from an EU member state (or its predecessor the EEC) with two exceptions, those being Sweden’s Ivar Rooth was head from August 1951 to October 1956 and Sweden’s Per Jacobsson from November 1956 to May 1963. Sweden only joined the EU in 1995.9 Europe’s claim over the top position is not outlined in any of the IMF’s articles or bylaws but is instead a “gentlemen’s agreement” established when the institution was set up.10 US and EU dominance in the international financial system is discussed later, along with modes of cooperation in that context.

The Aim of This Book This book does not seek to put forward a particular international or transatlantic relations theoretical position, although it does put forward arguments that lend themselves to particular perspectives. It also nevertheless presents considerable empirical evidence that contributes to theoretical debate. Based on considerable research and interviews with policymakers in the field of US and EU regulatory cooperation generally, US and EU financial markets policy and international financial institutions, this book presents extensive empirical evidence, detailed descriptive accounts, case studies and explores arguments to explain the developing transatlantic relationship in the late 2000s as the global financial crisis emerged in 2008–2009. It does this by seeking to explore a number of important questions in respect to the expansion of the US-EU cooperative relationship on financial markets matters in the period around the crisis. Essentially it has four objectives. Firstly, it aims to contribute to the literature by highlighting and discussing in depth the major routes/channels by which the US and the EU cooperate on financial markets policy, not only in respect to intergovernmental, transgovernmental and transnational cooperation, but also a fourth channel: US-EU cooperation in multilateral fora. In doing so, it discusses the patterns of cooperation and the main institutional fora in which cooperation takes place on financial markets issues. Secondly, this book aims to contribute to literature by expanding the focus on a wide range of forms of cooperation. Scholars have drawn attention to three main forms of regulatory cooperation, those being information exchange, mutual recognition, and regulatory harmonization.11 This book goes further by exploring and elaborating on other forms of cooperation, including the development of institutionalized regulatory dialogues, notably the US-EU Financial Markets Regulatory

 “IMF Managing Directors”, International Monetary Fund, 4 October 2014.  Keating, Joshua. 2011. “Why is the IMF Chief Always a European?”, Foreign Policy, 18 May. 11  Raymond J.  Ahearn. 2009. Transatlantic Regulatory Cooperation: Background and Analysis Specialist in International Trade and Finance, Congressional Research Service, August 24. 9

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Dialogue in 2002. It is important to not forget the intergovernmental forms of cooperation, such as international agreements, memorandums of understandings, protocols and accords etc., the former two of which have been used extensively in the area of financial markets cooperation in the transatlantic context. Thirdly, this book aims shows how the cooperative relationship intensified during the global financial crisis. Some scholars have shown how regulatory cooperation in particular sectors such as banking decreased after the crisis.12 This is not surprising as it is a policy area in which banking prudential rules are imported, often virtually in entirety, from standards developed by the Banking Committee of Banking Supervision (BCSC). This book discusses and argues through research and interviews that cooperation accelerated in respect to intergovernmental and transgovernmental inter-regulator channels in respect to a wide range of other financial markets issue-areas. Rather than attempting a quantitative approach to measuring cooperation, this was established clearly in interviews with US and EU officials at the heart of financial regulatory cooperation at the time. Fourthly, it aims to show how as the US and EU sought to work in multilateral fora to coordinate a response to the crisis and how US-EU cooperation led to a converged position on several issues that had the effect of implanting their respective preferences onto the post-crisis institutional and regulatory outcomes. It argues that an effective alliance was formed, the consequence of which was also a consolidation a defacto US-EU hegemony in international financial governance.

Scope of This Book This book can be framed in a number of ways. Firstly, it aims to examine the relationship between the US and the European supranational institutions. The US has extensive relationships with each of the EU member states, some of which have significance in the global economy, but this book seeks to examine the US and EU relationship specifically. As such, the term transatlantic is taken to mean relations between the US and the EU, and its postwar supranational institution predecessors. While the US and its key European trading partner have had a relationship for centuries, this changed after WW2 with the formation of the first supranational European authority, the European Coal and Steel Community (ECSC) in 1951 established by the Treaty of Paris. Two other institutions followed, being the European Economic Community (EEC) and the European Atomic Energy Community (Euratom) in 1957 with the signing of the Treaties of Rome.13  Howarth, David; Quaglia, Lucia. 2016. The ‘ebb and flow’ of transatlantic regulatory cooperation in banking, Journal of Banking Regulation, suppl. Special Issue, 17, Issue 1–2: 21–33. 13  The European Economic Community (EEC) was one of three Communities in the European Communities incorporated into the European Union (EU) when it was established in 1993. The others were the European Coal and Steel Community (ECSC) established in 1952, and the European Atomic Energy Community (EAEC or Euratom) also established in 1957. 12

Scope of This Book

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The creation of supranational authority in Europe led to the development of the European Union (EU) in 1993. With the gradual the shift of authority to Brussels as part of the process of political and economic integration in Europe, a new bilateral relationship with the US and that EU developed. It is this relationship considered in this book, so far as it relates to financial markets cooperation. The US of course throughout the postwar period and to this day has maintained separate relationships with each of the EU member states. While these have some bearing on the transatlantic relationship, this dimension is not the subject of this book. Furthermore, the term “financial markets” encompasses a lot of financial activity. Defining “financial markets” is a bit like defining “financial”; it encompasses numerous sectors, each of which is a large industry. Nevertheless the “financial markets” cover a wide spectrum of sectors, with the key sectors generally regarded as banking, securities and insurance. It also encompasses the capital markets, securities derivative markets, currency markets, commodities trading and assets management. A number of issues are also important to these markets and often discussed in the context of financial regulatory reform including accounting standards. Across these markets there are norms, standards, regulations, supervision regimes and regulatory bodies, domestic legislation, international institutions, international guidelines, and of course a wide range of actors. Given this, not everything can be discussed in one volume. This book does not and cannot look at all of these sectors. I have not taken a strict approach in only discussing selected sectors as I did not consider it necessary. The objective of this book is to highlight and discuss channels of financial regulatory cooperation broadly, namely at intergovernmental, transgovernmental and international level. Another relevant term is regulation, which can be broadly defined as “the organization and control of economic, political, and social activities by means of making, implementing, monitoring, and enforcing of rules”.14 Cooperation arises, according to Keohane, “when actors adjust their behaviour to the actual or anticipated preferences of others, through a process of policy coordination”.15 A set of decisions is coordinated if adjustments have been made in them, such that the adverse consequences of any one decision for other decisions are to a degree and in some frequency avoided, reduced, or counterbalanced or overweighed.16 Keohane’s view necessarily implies conflict within the relationship. Where harmony reigns, he says, cooperation is unnecessary. Other scholars have suggested that there is no one single type of cooperation. It may not necessarily be a single variable, but there could be several, each with different corresponding theories to explain it. For example, one theory could explain state preferences for cooperation, another could  Walter Mattli, Ngaire Woods. 2009. “In Whose Benefit? Explaining Regulatory Change in Global Politics”, in Walter Mattli, Ngaire Woods (eds), The Politics of Global Regulation, Princeton University Press, Princeton: 1. 15  Keohane, Robert. 1984. After Hegemony: Cooperation and Discord in the World Political Economy, Princeton University Press, Princeton: 51–2. 16  Lindblom, Charles E. 1965. in Keohane, Robert. 1984. After Hegemony: Cooperation and Discord in the World Political Economy, Princeton: Princeton University Press: 51. 14

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explain the outcome of political bargaining, and another could explain compliance with institutional norms.17 Scholarly debate on cooperation has constituted an extensive point of debate in international relations. Transatlantic regulatory cooperation can take three main forms, according to Ahern: information exchange; mutual recognition (attribute others) which takes place when two or more jurisdictions agree to recognize each other’s rules in lieu of domestic rules; and regulatory harmonization, which refers to the establishment of similar (harmonized) rules (attribute) mainly through international standard setting.18 However, as discussed in Chap. 5, this list can be extended to encompass: information exchanges, regular dialogues, informal agreements, national treatment regimes, mutual recognition agreements (of which there are several varieties and types), regulatory equivalence, harmonization/policy convergence.

Focus on the Global Financial Crisis Period One of the focuses of this book is on the transatlantic relationship at the outset of and in early period of the global financial crisis in 2008–2009. The GFC is frequently referred to as a period of extreme stress in the global financial system in 2007 and 2008, although it can also arguably encompass the period when housing prices in the US began to slide and mortgage loan delinquencies rose, starting the process that generated many of the losses to the system. The crisis hit a peak with the near collapse of Bear Stearns in March 2008, which was later acquired by JP Morgan, which came amid significant stock market losses that continued throughout 2009. The shock to the US economy at least subsided when the National Bureau of Economic Research (NBER) advised in June 2009 that the US recession had ended, and President Barack Obama declaring in January 2012 that the markets had stabilized. In the midst of the crisis, the cost to European states of bailing out their respective banks and financial systems led to deteriorating sovereign balance sheets, leading into a period referred to as the Euro Crisis or European debt crisis. This book deal with US-EU cooperation on financial regulatory reform from around September 2008, which is when US and European governments concertedly intensified their efforts to crisis manage the financial system. It continues to discuss matters under US-EU negotiation through to 2011. This period is examined notably as it represented a period of notable intensification of the transatlantic cooperative relationship on financial markets cooperation. This is established by analysis of cooperation at intergovernmental level as well as transgovernmental level and through extensive research and interviews. It is when many of the financial regulatory reforms discussed and negotiated at the height of the crisis were either settled  Moravcsik, Andrew. 1989. “Disciplining Trade Finance: The OECD Export Credit Arrangement”, International Organization, 43(1), 175. 18   Ahearn, R.J. 2009. Transatlantic Regulatory Cooperation: Background and Analysis. Congressional Research Service Report for Congress, August, Washington DC. 17

Structure of This Book

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upon or put in place. In short, US-EU cooperation during the financial crisis placed a spotlight on the overall patterns and power dynamics more than any other period in recent decades. As such, transatlantic financial regulatory cooperation can be thus viewed as the process of negotiation, implemention, monitoring, and enforcement of financial markets rules in an effort to coordinate policy outcomes in the transatlantic context.

Structure of This Book This book is structured as follows. After an overview of the topic and review of literature in this chapter, Chap. 2 provides background to the evolution of transatlantic relations and the emergence of financial markets regulatory cooperation. Chapter 3 discusses the US-EU intergovernmental relationship and how financial markets emerged as a political issue at heads of state level in the 1990s to such a degree that, amid broader changes in patterns of intergovernmental relations and progress in European integration, the overall transatlantic financial markets agenda widened and became central to US-EU respective interests. It concludes with a discussion of several plausible explanations for an apparent task separation between intergovernmental and transgovernmental actors, including historical institutionalism, possible constructivism and neoliberal and realist perspectives. It concludes by discussing how the financial crisis showed that states cannot be dismissed as key actors in this policy area. Chapter 4 presents an empirical case study on the intergovernmental relationship, presenting research as to the level of cooperation between the US and the EU at the height of an acute period of the global financial crisis in 2008–2009. It shows how, despite ongoing discussions in transgovernmental fora on financial markets reform, the US and the EU took over the financial markets reform agenda to push a coordinated response to the crisis through the G7 and the G20. Chapter 5 discusses the development of US and EU cooperation on financial regulatory matters at regulator level. Starting with regulatory cooperation on financial markets issues emerging in the 1990s, it highlights the drivers, patterns in cooperation and the main forms of agreements. It then discusses the institutionalization of financial regulatory cooperation in the early 2000s and how a marked intensification in cooperation took place during the global financial crisis. In an effort to highlight the degree of cooperation on particular issue-areas, Chap. 6 presents three case studies: cooperation on credit ratings agency regulation, accounting standards convergence, and reform of credit default swap rules. Chapter 7 discusses how the US and the EU cooperative relationship on financial markets in the global financial rulemaking environment has evolved in recent decades. It discusses how although the US and the EU have remained rivals, they have formed a defacto alliance, with a largely converged agenda arising out of bilateral negotiations that was transposed into the international environment. This was notably evident during the global financial crisis, with the outcome being a

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maintenance of US-EU “club” dominance albeit with a changed US-EU power balance. In an effort to highlight the US and the EU cooperative relationship on a key matter of international concern, Chap. 8 presents a case study, discussing how US and EU preferences converged to give the International Monetary Fund (IMF) a key role during the crisis. It discusses how an effective US and the EU alliance served their own respective interests, including internal European interests, and reinforced their joint position in the world of global financial governance. Chapter 9 concludes by summarizing key findings, research implications and possibilities for future research.

Theoretical Contributions to the Topic Transatlantic financial regulatory cooperation is just one topic within the broader field of transatlantic relations which itself is a field of international relations. In fact, transatlantic relations were international relations as international relations emerged as a field of study in the wake of WW1.19 The war had created a desire to understand the conditions of relations between states as a way to prevent further war. Informed by the ideals of the anti-war societies with their roots in western political thought, scholarly inquiry focused on questions to do with war, power and peace. This explains why, in terms of examining the transatlantic relationship generally, there really is no “year zero” as Pollack and Shaffer point out.20 In fact, ideas of a closer transatlantic relationship, an economic and even a politically integrated one, can be traced back to at least pre-WW1. Historians, political scholars, and writers had long looked at the US-European relationship and envisioned one that could be consolidated, even integrated. Several scholars including Coudenhove-Kalergi in his book Pan Europe in 1923 championed the idea of a United States of Europe.21 Some even advocated a united transatlantic polity. Clarence Streit in 1939, for example, proposed a transatlantic political union that involved joint citizenship, a defense force, a customs-free economy, a monetary union and postal and communications union postal.22 However, WW2 changed the transatlantic relationship dramatically, with the US and European economic relationship consolidating as part of efforts to rebuild Europe, prevent future war, and build a new postwar international financial system. With Europe devasted by war yet again, the US played a formative role in rebuilding 19  Knutsen, Torbjorn. 1997. A History of International Relations Theory 2nd ed, Manchester University Press, Manchester and New York: 211. 20  Pollack, Mark A and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 6. 21  Eilstrup-Sangiovanni, Mette. 2006. Debates of European Integration, Palgrave Macmillan, Hampshire & New York: 19. 22  Streit, Clarence. 1939. Union Now, A Proposal for a Federal Union of Democracies of the North Atlantic, Harper & Brothers, New York.

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and reshaping the political and economic landscape in Europe, a role that been well documented. The events of the war augmented US interests in Europe that had been planted in WW1. As discussed in the subsequent chapter, the US played a pivotal role in the establishment of the European Coal and Steel Community (ECSC) in 1951,23 which was designed to regulate industrial production in the Ruhr area of Germany under a common authority controlled by the Benelux countries, France, Italy and West Germany. The US involvement in Europe, primarily through the funding of the Marshall Plan, but also through its support of the burgeoning process of European integration, intimately tied the two sides of the Atlantic. The ECSC became the basis for what would later become the European Economic Community in 1957, which in turn became the European Union (EU) in 1993, and all along the US played a driving role. In the 1980s the EU began to roll out an extensive financial services reform program, with the US also enacting legislation that affected EU financial institutions. These developments took place in the context of the increasingly interdependent nature of the US and EU economies, banking markets and financial markets. Additionally, Europe’s capacity as an actor in financial services policy was not overly significant on the international stage; it was the US that had called the shots in the international financial rule-making environment to a large degree.24 It was also when most US academics were more focused on Japanese and East Asian industrialization as a challenge to America’s economic future than on transatlantic economic relations.25 At the same time, European academics were pre-occupied with ongoing European integration and efforts to complete the European internal market. As historian, diplomat, journalist and international relations theorist Edward Carr wrote, each new discipline has come into being in response to a social or technical need.26 As such it is no surprise that scholars began to scrutinize transatlantic financial regulatory cooperation in the 1990s and the 2000s in response to greater US and EU engagement on regulatory cooperation generally. This shift was triggered broadly by the ongoing harmonization of internal EEC and later EU rules as part of the single market program, the growth of transatlantic and global financial markets, the ongoing internationalization of financial markets rules, and changing geopolitical and trade priorities. As US and EU cooperation on regulatory reform intensified, scholarly attention turned to examination to the causes and drivers of the

 The Treaty establishing the European Coal and Steel Community was signed in Paris on 18 April 1951 and entered into force on 23 July 1952. 24  Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes, Princeton University Press, Princeton, New Jersey; Posner, Elliot & Véron, Nicolas. 2010. “The EU and financial regulation: power without purpose?”, Journal of European Public Policy, 17: 3: 400–415. 25  Pollack, Mark A and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 19. 26  Knutsen, Torbjorn. 1997. A History of International Relations Theory 2nd ed, Manchester University Press, Manchester and New York: 211. 23

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closer transatlantic relationship, the role of transgovernmental actors in change, the role of the EU in global rulemaking, the power shifts between the US and the EU, the changing dynamics of transatlantic dispute resolution among other questions.

The Intergovernmental Relationship As mentioned earlier, transatlantic relations were largely seen in the postwar period through the prism of conventional international relations thinking until the 1990s when changes in the international dynamics hastened. The idea that negotiations between states were conducted at head of state level has long been a fundamental understanding in international relations. Intergovernmental relations are, as Pollack and Shafer note, the “bread and butter” of traditional international relations.27 Indeed, initial international relations theories of realism and liberalism considered states and their heads of government representatives, as not just the central actors in international relations, but the only actors. The term intergovernmental arose in the 1960s as a response to ideas of neofunctionalism as a theory to explain regional integration, notably European integration. Hoffmann sought to reject the idea that European integration as a self-perpetuating process and saw rational states as deliberatively driving greater integration.28 While his concept of intergovernmentalism was consistent with the realist view of states as the central unit in world politics, Hoffmann nevertheless acknowledged social influences on change and was flexible as to the realist idea that states were motivated by self-interest.29 Gaining popularity notably in the 1970s, scholars developed ideas further, with historians such as Alan Milward, and later Andrew Moravcsik, developing the idea of liberal intergovernmentalism. This emphasized the role of national governments in driving political processes such as political integration. Fundamentally intergovernmentalism is a term used to describe process to explain cooperation, and more specifically economic and political integration. Other theories contributed to alternative views, such as Robert Putnam’s model of international diplomacy, which viewed relations as a “two-level” game that sought to explain outcomes other than those reached by force.30 His model outlines a process by which governments play two games based on preferences, one domestic and the other international. Domestically, interest groups pursue their interests by pressuring the government to adopt favourable policies while politicians seek  Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 5. 28  Hoffmann, S. 1963. Discord in Community: The North Atlantic area as a partial international system, in F. O. Wilcox & H. F. Haviland (Eds.), The Atlantic Community, New York, NY. 29  Rosamond, Ben. 2000. Backlash, Critique and Contemplation, in Theories of European Integration, Palgrave, Houndmills/New York: 77. 30  Putnam, Robert D. 1988. Diplomacy and Domestic Politics: The Logic of Two-Level Games, International Organization, 42, No. 3: 427–460. 27

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power by constructing coalitions among those groups. Going to the table with a set of national preferences, at the international level national governments seek to satisfy domestic pressures while minimizing the adverse consequences of foreign developments.31 International agreements can be reached when negotiator “win-­ sets” overlap with one another. The larger each of the party’s win-sets, the more likely they are to overlap. Conversely, the smaller the win-sets, the greater the risk that the negotiations will break down.32 Other theories like hegemonic stability theory developed by Robert Keohane,33 regime theory expanded by Stephen Krasner34 and theories of regime change such as surplus capacity by Susan Strange,35 have contributed to understandings of power and position in transatlantic relations. These are particularly relevant in seeking to understand intergovernmental relations particularly. Amid changes in the security, trade and financial dimensions, the US and the EU formed successive intergovernmental level agreements in the 1990s, as discussed in the subsequent chapter. These raised questions and inspired debate around transatlantic relations generally including issues to do with transatlanticism as a form of governance and possibly even regionalism. These agreements—the Transatlantic Declaration in 1990, the New Transatlantic Agenda (NTA) in 1995 and the Transatlantic Economic Partnership (TEP) in 1998—were particularly interesting and highlighted the recognition of the construction of a more institutionalized form of international relations. The NTA created what Pollack described as “a new form of international governance” as a way to cope with the growing levels of transatlantic and global interdependence.36 Peterson noted that the transatlantic relationship of the 1990s had become be characterized by “considerable complicity” among the highest levels of government.37 He and Steffenson even wondered whether these agreements and the institutions they created might be seen as part of a “new institutionalism”.38 Petros C.  Mavroidis’ suggestion that the relationship might be regarded as a form of

 Ibid.  Ibid: 438. 33  Keohane, Robert. 1984. After Hegemony: Cooperation and Discord in the World Political Economy, Princeton University Press, Princeton. 34  Krasner, Stephen D. 1982. Structural Causes and Regime Consequences: Regimes as Intervening Variables International Organization, 36, No. 2, International Regimes: 185–205. 35  Strange, Susan & Tooze, Roger (eds.). 1981. The International Politics of Surplus Capacity, George Allen & Unwin, London. 36  Pollack, Mark A and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 5. 37  Peterson, John. 2009. in Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford. 38  Peterson, John and Rebecca Steffenson. 2009. “Transatlantic Institutions: Can Partnership be Engineered?”, British Journal and Politics and International Relations, 11: 26. 31 32

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regionalism39 was not surprising given the attention being afforded to other ­regionalist projects around the world, including NAFTA. No-one however declared the transatlantic relationship as being another akin to that in the EU.

Transatlantic Interdependence There are a number of other scholarly debates that contribute significantly to the current view of the US-EU relationship, particularly on financial markets cooperation and economic cooperation as well. One of those is the debate on interdependence. The rethink about the state as a unitary actor in the 1950s and 1960s also coincided with rising levels of mutual economic involvement. Scholars looked at what could be considered the butter between the bread. Growing levels of interdependence were seemingly pulling and binding the US and Europe markets together. A concept that recognizes the interconnectedness of states in international relations, interdependence between states has been acknowledged since Machiavelli’s time,40 but the postwar period saw development of the idea as an explanation for state behaviour, with greater attempts to define and measure it and gauge its effect on state behaviour and world politics. Deutsch in the mid-1950s defined interdependence broadly in terms of “interlocking relationships” that bound parties together in a more compelling way than just being responsive to each other’s concerns.41 He argued that transnationalism explained the process of political integration, seeking to quantify levels of interdependence. One of the earliest critics of the argument that interdependence was a significant force was Kenneth Waltz who in 1970 argued that US interdependence with European nations in particular was “a myth”.42 Deutsch and Eckstein and Waltz’s dismissal of the potency of economic relations in influencing foreign policy were criticised and countered by subsequent studies that measured interdependence in a different way. Further, Waltz’s argument that “each state regulates its own affairs” and retains the ability to do so—citing as an example the US’ ability to disentangle itself from other world economies during WW2 to develop new large-scale industry with great ease while fighting a war on two fronts—has continued to resonate with realists.

 Mavroidis, Petros. 2001. “Transatlantic regulatory cooperation: Exclusive Club or Open Regionalism?”, in George Bermann, Matthias Herdegen and Peter Lindseth (eds.), Transatlantic Regulatory Cooperation: Legal Problems and Political Aspects, Oxford University Press, Oxford: 263–270. 40  Baldwin, David A. 1980. “Interdependence and Power: A Conceptual Analysis”, International Organization, 34, No. 4: 484. 41  Deutsch, Karl W. 1954. Political Community at the International Level: Problems of Definition and Measurement, Doubleday, New York: 37. 42  Waltz, Kenneth N. 1970. “The Myth of National Interdependence”, in Kindleberger, Charles P. (ed.), The International Corporation, MIT Press, Cambridge, Mass.: 206. 39

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Deutsch and Eckstein conducted a study in 1961 that attempted to measure interdependence by examining the ratio of foreign trade to gross national product between 1890 and 1959.43 Arguing that while the ratio of foreign trade to GNP rose during the earlier years of industrialization, they found it had decreased in later years. Critics criticised the study as flawed, with Rosecrance in 1973 pointing out for example that their study used current US dollar terms to calculate trade values.44 Lipsey later recalculated the ratio of American exports to GNP in 1913 constant dollars and found trade levels had gone up. In the late 1960s the argument moved away from measuring interdependence in terms of volume, with Cooper in 1968 developing concepts further, measuring it not just in terms of volume, but of the “sensitivity” of economic transactions between two or more nations to economic developments within those nations.45 While acknowledging growing levels of transatlantic trade, greater international travel, higher levels of capital movement and the evolution of communications technologies, he emphasized the “sensitivity” to economic developments of one nation to another. Significantly, Cooper questioned the actual political implications of such changes, suggesting that greater transatlantic interdependence compromised national autonomy. It did so not only by affecting a country’s balance of international payments, forcing countries to take policy action in this area that they would otherwise “find objectionable”, but also by affecting a country’s ability to regulate tax and banking.46 In an effort to find a solution to such problems, he suggested interdependent countries could either accept greater integration and the loss of national autonomy and engage in joint decision-making on economic policy; accept integration but preserve autonomy by compensating financially for prolonged deficit payments; or reject integration and re-impose trade and capital barriers.47 In an effort to determine the conditions under which interdependence might affect policy decisions, Rosecrance et  al. distinguished between two types of interdependence and suggested two measurements: horizontal interdependence (based on transactions, whether the flow of money, or people and goods) or vertical interdependence, as measured by the responses “of one economy to another in terms of changes in factor prices”.48 The early part of the 1970s saw the oil crises and the collapse of the Bretton Woods system of pegged exchange rates, characterized by a distinct “leaning”  Deutsch, Karl and Eckstein, Alexander. 1961. “National Industrialization and the Declining Share of the International Economic Sector, 1890–1959”, World Politics, 13, No. 2, January. 44  Rosecrance, Richard & Stein, Arthur. 1973. “Interdependence: Myth of Reality”, World Politics, 26, No. 1 (October 1973): 1–27. 45  Cooper, Richard N. 1968. The Economics of Interdependence: Economic Policy in the Atlantic Community, Columbia University Press, New York: 5–6. 46  Ibid: 6. 47  Ibid: 262. 48  Rosecrance, Richard, Alexandroff, Alan  W., J.  Kroll Koehler, Liqueur,  Shlomit and Stocker, John. 1977. “Whither Interdependence?”, International Organization, 31, No. 3: 428–429. 43

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towards a more globalized society without a dominant structure of cooperation (and conflict) or, as Keohane and Nye noted, a more polyarchical world order.49 The growing levels of interdependence and changes in decision-making in world politics raised even bigger big questions about the effect of interdependencies on government behaviour. Building on Rosecrance’s suggestion that interdependence in its most general sense consisted of a relationship of interests such that if one nation’s position changes other states will be affected by that change, Keohane and Nye later developed a theory of complex interdependence, referring to dependence as “a state of being determined or significantly affected by external forces” and interdependence simply as “mutual dependence”.50 In the context of world politics, this meant situations characterized by reciprocal effects among countries or among actors on different countries.51 Keohane and Nye called into question the core realist assumptions that states were the dominant actors in world politics, that military force was the most effective tool to effect policy, and that military and security politics were the dominant paradigms in a hierarchy of issues, with economic and social affairs placed lower on the hierarchy.52 However, interdependence alone was not a satisfactory and comprehensive explanation for the US-European relationship. Cooper’s analysis not only acknowledged the growing interdependence between the US and Europe but highlighted its importance to policy decision-making. As Rosamond argues, interdependence remains politically significant because it contributes to understanding of the policy behaviour of actors.53

Conceptualizing Transgovernmental Another level of transatlantic relations discussed in this book is that characterized by extensive discussion, negotiation and agreement between transatlantic regulators in an effort to find solutions to mutual and respective regulatory problems. The rise in the level of international regulatory cooperation in the 1990s and early 2000s coincided with the rise to prominence of transgovernmental networks.54 In the area of financial markets, a pattern emerged in which heads of state would set priorities and principles and a broad agenda in framework intergovernmental agreements,  Keohane, Robert O and Nye, Joseph S.  Jr. 1987. “Power and Interdependence Revisited”, International Organization, 41, No. 4: 726. 50  Keohane, Robert O and Nye, Joseph S. Jr. 1977. Power and Interdependence: World Politics in Transition, Little, Brown and Company, Boston & Toronto: 8. 51  Ibid. 52  Ibid: 24. 53  Rosamond, Ben. 2000. Theories of European Integration, Palgrave, Houndmills/New York. 54  Raustiala, Kal. 2002. “The Architecture of International Cooperation: Transgovernmental Networks and the Future of International Law.” Virginia Journal of International Law vol.43 no.1: 1–92. 49

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with regulators subsequently tasked with the detail, identifying problem areas, discussing solutions and forming agreements of their own. This was the rule but there were exceptions in which regulators formed agreements without any reference to executive or political level decision, such as the 1991 agreement between the US Securities and Exchange Commission (SEC) and the European Commission to exchange information and provide mutual assistance on securities law enforcement and maintain the financial integrity of market participants.55 The recognition of the role of such actors in regulation has its origins in the 1970s. Keohane and Nye, in the course of examining what they saw as increased international interdependencies, were struck by the increasing role of non-state actors in international and transatlantic relations. In an introduction to a special issue of the journal International Organization in 1971, they argued that the growth of transnational interactions among unions, multinationals, bankers, non-­ governmental organizations and other non-state actors meant that “the state-centric paradigm” of understanding international politics was becoming rapidly outdated.56 They contended that while transnational relations were not a new phenomenon, the rise in sensitivity as a result of technological changes and the greater role of non-­ state actors in shaping policy was new.57 Keohane and Nye observed that as bureaucracies sought to cope with the problems that arose in inter-government relations at an acceptable cost, they were increasingly dealing with each other directly rather through foreign offices. Increasingly, bureaucrats in government agencies, regulatory agencies and delegated authorities seemed to be playing more significant roles in international relations, not only as shapers but as makers of policy. Scholars examined how such actors were interacting to actually create or shape policy outcomes and what this meant for the state as a unitary actor.58 Keohane and Nye suggested that when transnational actors affect the course of international events, they become competitors of the state.59 However, the state, as Slaughter argued, was not being undermined but was “disaggregating into its separate, functionally-distinct parts”.60 Government officials formed horizontal networks so as to prepare and enforce national policies informally. Non-state actors did not so much replace the intergovernmental channel

 European Commission. 1991. “Joint Statement on the Establishment of Improved Cooperation between the United States Securities and Exchange Commission and the European Commission of the European Communities”, 23 September. 56  Keohane R, and Nye S.  J. 1971. “Transnational Relations and World Politics”, International Organization, 25, No. 3: 345. 57  Keohane, Robert O. and Nye, Joseph S.  Jr. 1987. “Power and Interdependence Revisited”, International Organization, 41, No. 4: 725. 58  Pollack, Mark A and Shaffer, Gregory C. 2001. Transatlantic Governance in Historical and Theoretical Perspective, in Pollack and Shaffer, Rowman and Littlefield, Oxford. 59  Keohane R, and Nye S.  J. 1971. “Transnational Relations and World Politics”, International Organization, 25, No. 3: 330. 60  Slaughter, Anne-Maree. 1997. “The Real New World Order”, Foreign Affairs, 76 Foreign Affairs 183, 195. 55

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of inert-state relations so as supplement it. However, issue-specific border-crossing networks could potentially take authority away from central governmental authorities.61 Transgovernmental actors had, Anne-Maree Slaughter argued, created a “new world order”, one in which regulators were not only discussing policy implications and better forms of cooperation, but were also setting the rules. Transgovernmental networks had dramatically changed the world of international politics, with such networks the “new diplomats”.62 Even so, some scholars continued to recognize the role of states in this development. In the area of financial regulation, Baker for instance argued that transgovernmentalism had become “complex and multifaceted” and a mechanism through which state bureaucracies could construct alliances and coalitions to influence world order, including the actions of international institutions.63

The Turn Towards Governance The 1980s and 1990s also saw, as Bulmer puts it, a distinct “turn” towards the study of governance64 in the field of international relations. Rising to prominence in the international public policy circles, notably in respect to development and environmental policy, the term governance has become associated with the web of international agreements, codes, statements, principles and other soft law instruments as well as mechanisms of enforcement in the international environment. In the international relations context, it is used to describe phenomena that go beyond “government” and legal authority such as international law.65 The Commission on Global Governance, established in 1992 with the support of the United Nations Secretary-­ General to suggest new mechanisms of international cooperation, defined it as “the sum of the many ways individuals and institutions, public and private, manage their common affairs. It is a continuing process through which conflicting or diverse interests may be accommodated and co-operative action may be taken”.66

 Ansell, C. 2000. The networked polity: Regional development in Western Europe, Governance 13(3): 303–333. 62  Slaughter, Anne-Marie. 2004. “A New World Order”, Princeton University Press: 14. 63  Baker, Andrew. 2009. “Deliberative Equality and the Transgovernmental Politics of the Global Financial Architecture”, Global Governance, 15, No. 2: 195–218. 64  Bulmer, Simon. 1994. “The New Governance of the European Union: A New Institutionalist Approach”, Journal of Public Policy, 13: 351–380. 65  Weiss, Thomas G. 2000. Governance, good governance and global governance: conceptual and actual challenges, Third World Quarterly, 21, No 5: 795–814. 66  “Our Global Neigbourhood”. 1995. Commission on Governance, Oxford University Press. 61

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Governance thus involves both public and private actors and formal and informal rules.67 Concepts of governance draw heavily on ideas of social constructivism. Pollack and Shafer have suggested “governance” implies that social conflicts can be resolved, and that sustained cooperation is promoted, not only by a hierarchical sovereign government, but also by social institutions composed of multiple governments or a mix of governments and nongovernmental actors.68 The ongoing process of European integration was the most notable among the international events inspiring this debate. Governments in Europe during these decades increasingly delegated governance—both at the national and supranational levels—to regulatory authorities.69 Many scholars focused on regulatory politics and the rise of the regulatory state so far as the EU was concerned.70 This led to acknowledgment of an “EU governance” and as multilevel governance and supranational governance as firm theories. Such concepts were rooted in the earlier study of policy networks, both within a state-based context, in the EU or in the international context, coincided with the growth of network governance as a theory of explaining policy outcomes.71 Such ideas went back to the postwar years. While state actors were seen as the “traditional” actors in policy development, Haas and other neofunctionalists noted the role of a range of actors particularly in the EU policy process in the late 1950s. These included officials of trade associations, organized labour, higher civil servants and active politicians.72 Scholarly examination of non-state actors in world politics were examined in the 1960s by scholars including such as Wolfers, Burton and Roseneau, and Menderhausen.73 In the 1970s, Huntington defined them as large, hierarchically organized, centrally directed bureaucracies that perform a set of relatively limited, specialized and, in some sense, technical functions across one or more international boundaries.74 The writings of Cooper, Rosecrance and Stein and others came at a time of observations about how non-state actors were having a real effect on national policies. Huntington also considered the growing role of transnational organizations in world politics, including intergovernmental  Sending, Ole Jacob and Neumann, Iver B. 2006. Governance to Governmentality: Analyzing NGOs, States, and Power, International Studies Quarterly, 50, No. 3: 651–672. 68  Pollack, Mark A and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 19. 69  Coen, David, & Thatcher, Mark. 2008.“Network Governance and Multi-level Delegation: European Networks of Regulatory Agencies”, Journal of Public Policy, 28: 50. 70  Bulmer, Simon. 2009. “Institutional and Policy Analysis in the European Union: From the Treaty of Rome to the Present”, in D.  Phinnemore, A.  Warleigh-Lack in Reflections on European Integration. 50 Years of the Treaty of Rome, Palgrave MacMillan: 121. 71  Coen, David, & Thatcher, Mark. 2008.“Network Governance and Multi-level Delegation: European Networks of Regulatory Agencies”, Journal of Public Policy, 28: 49–71. 72  Haas, Ernst B. 1968. The Uniting of Europe 1950–1957, Stanford University Press, Stanford: 16. 73  Wolfers, Arnold. 1962. “The Actors in World Politics” in Discord and Collaboration Essays on International Politics, ed. Wolfers, Arnold, Johns Hopkins Press, Baltimore: 23. 74  Huntington, Samuel P. 1973. “Transnational Organizations in World Politics”, World Politics, 25, No. 3 (Apr., 1973): 333. 67

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organizations like the World Bank and non-government organizations like multinational corporations, churches and transnational interest groups, as well as US government agencies like the Central Intelligence Agency and the United States Agency for International Development.75 A large part of the rise in inter-state relations took place between the US and the-­ then EEC. Keohane and Nye sought to reinvigorate the discussion about non-state actors in policy in 1971, noting that it was obvious that the “interactions of diplomats and soldiers do not take place in a vacuum”.76 They also drew attention to the plethora of “multinational business enterprises and revolutionary movements; trade unions and scientific networks; international air transport cartels and communications activities in outer space”.77 That such actors formed coalitions and engaged in extensive interactions in a way which was not controlled by states raised questions of power, the ability of states to contain them, the implications for US foreign policy, and the  challenges  that transnational relations raise for international organizations.78 Several scholars have impressed the need to see “policy networks” as a generic term that encompasses a number of types of network relationships between state and business.79 This relationship has been theorised in depth, with a wide range of characterizations, from statism/pantouflage, captured statism, clientelism, pressure pluralism and parental relationships to iron triangles and issue networks, from sectoral corporatism and macro-corporatism/intersectoral concertation to state corporatism and sponsored pluralism. Such ideas have been the basis for theoretical understanding of transgovernmentalism and transnationalism since.

A Transatlantic Governance? By the 2000s, scholars considered whether the transatlantic relationship had constructed a form of governance amid successive agreements.80 Notably Pollack and Shafer considered whether these agreements and closer cooperation broadly could

 Ibid; See also Keohane, Robert O and Nye, Joseph S. Jr. 1974. “Transgovernmental Relations and International Organisations”, World Politics, 27, No. 1: 39–62. 76  Keohane, Robert O and Nye, Joseph S. Jr. 1971. “Transnational Relations and World Politics: An Introduction”, International Organization, Summer, 25, No. 3: 329. 77  Keohane, Robert O and Nye, Joseph S. Jr. 1971. “Transnational Relations and World Politics: An Introduction”, International Organization, Summer, 25, No. 3: 331. 78  Ibid. 79  Rhodes W.  A. and Marsh, David. 1992. “New directions in the study of policy networks”, European Journal of Political Research, 21, Issue 1–2: 181–205.; G. Jordan, & K. Schubert. 1992. “A Preliminary Ordering of Policy Networks,” European Journal of Political Research, 21, Issue 1–2: 7–28. 80  Pollack, Mark A and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 29. 75

A Focus on Financial Markets Regulatory Cooperation

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be regarded as an “experimental form of governance”,81 a form of rulemaking that involves the setting of revisable framework goals, the encouragement of multiple types of rulemaking, measures to gauge their achievement, reporting and peer evaluation to determine what works best.82 Few scholars sought to apply such concepts to the transatlantic context. There were suggestions that the NTA signed in 1995 could be seen as a form of governance in three respects: it had elevated bilateral relations to such primary importance on such a wide range of issues, political and economic; it represented a deliberate and highly unusual attempt to establish close and lasting links and multiple levels; and it represented an important experimental in “deep integration” and “deep institutionalization”.83 This was a theme that US and EU leaders maintained throughout the 2000s and since. Examining whether the transatlantic relationship can indeed be regarded as a form of integration goes beyond the scope of this book, however, the US and EU relationship is unique in that it is highly complex, multilevel and interdependent and yet there exists no supranational authority as in the EU.

A Focus on Financial Markets Regulatory Cooperation Up until the 2000s scholars had not focused on financial markets regulation as a priority issue. After all, the EU’s financial services legislative program had only just begun in the early 1990s. Scholars had explored US and EU financial regulation independently but not on a transatlantic basis. Michael Moran in 1991 examined the tussle between private and public interests in regulatory reform in The Politics of the Financial Services Revolution,84 principally so far as it related to the US, while Jonathan Story and Ingo Walter focused on Europe in Political Economy of Financial

 Sabel, Charles and Zeitlin, Jonathan. 2010. “Learning from Difference: The New Architecture of Experimentalist Governance in the EU”, in Sabel, Charles and Zeitlin, Jonathan (eds), Experimentalist Governance in the European Union: Towards a New Architecture, Oxford University Press, Oxford: 1–28; De Búrca, Gráinne; Keohane, Robert O.; Sabel, Charles. 2013. “New Modes of Pluralist Global Governance”, New York University Journal of International Law and Politics, 45, No. 3: 723–86. 82  Sabel, Charles, Zeitlin, Jonathan. 2010. “Experimentalist Governance in the European Union: Towards a New Architecture” in David Levi-Faur (ed) The Oxford Handbook of Governance, Oxford University Press, Oxford; Campbell-Verduyn, M. and Porter, T. 2014. ‘Experimentalism in European Union and global financial governance: interactions, contrasts, and implications’, Journal of European Public Policy, 21(3). 83  Pollack, Mark A. 2005. “The New Transatlantic Agenda at Ten: Reflections on an Experiment in International Governance”, Journal of Common Market Studies, 43, Issue 5: 902. 84  Moran, Michael. 1991. The Politics of the Financial Services Revolution: The U.S.A. U.K. and Japan. St. Martin’s Press, New York. 81

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Integration in Europe85 amid the rollout of the EU’s financial services legislative program. It was not until the late 1990s that scholars began to explore questions around financial markets regulation in more depth, with most of the attention focusing on the fast-evolving international financial regulatory environment. As the EU’s legislative program began to unfold, the challenges in resolving the concerns of US and EU financial institutions in each other’s markets became more acute, as discussed in subsequent chapters. During the 2000s, a number of scholars examined specific problems in financial regulation so far as they related to the regulation of securities,86 accounting standards,87 hedge funds,88 stock exchanges,89 banking generally90 and the Basel capital standards.91 Few scholars have sought to assess and measure levels of transatlantic cooperation, however. Although Quaglia found the transatlantic cooperation in the area of banking regulation decreased after the global financial crisis, this has not been the case in respect to other key areas of financial markets regulation, including negotiations over the European Market Infrastructure Regulation (EMIR) that set new post-­ financial crisis rules on OTC derivatives, central counterparties and trade repositories that materialized as Regulation (EU) No 648/2012. It was also not the case with negotiations on the Directive on Markets in Financial Instruments in 2011 and 2012, which created a legal framework for securities markets, investment intermediaries  Story, Jonathan and Walter, Ingo. 1997. Political Economy of Financial Integration in Europe: The Battle of the System, Manchester University Press, Manchester. 86  Coleman, William and Underhill, Geoffrey. 1995. Globalization, Regionalism and the Regulation of Securities Markets, Journal of European Public Policy 2 (3): 488–513. 87  Posner, Elliot. 2009. “Making Rules for Global Finance: Transatlantic Regulatory Cooperation at the Turn of the Millennium”, International Organization 63, Fall 2009: 665–99; Martinez-Diaz, L. (2005) ‘Strategic Interests and Improvising Regulators: Explaining the IASC’s Rise to Global Influence, 1973–2001’, Business and Politics 7(3): 1–26; Karel van Hulle. 2004. From Accounting Directives to International Accounting Standards. In The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice, edited by Christian Leuz, Dieter Pfaff, and Anthony Hopwood, 349–75. Oxford, England: Oxford University Press. 88  Fioretos, O. 2010. “Capitalist diversity and the international regulation of hedge funds”, Review of International Political Economy 17(4): 696–723. 89  Lutz, Susanne. 1998. The Revival of the Nation-State? Stock Exchange Regulation in an Era of Globalized Financial Markets. Journal of European Public Policy 5 (1): 153–68. 90  lom, Jasper (2014) “Banking.” In Europe and the Governance of Global Finance, edited by Mügge, Daniel. Oxford: Oxford University Press; Verdier, Daniel. 2003. Moving Money: Banking and Finance in the Industrialized World. Cambridge University Press, Cambridge. 91  Singer, David Andrew. 2004. Capital Rules: The Domestic Politics of International Regulatory Harmonization, International Organization 58 (3): 53l–65; Singer, David Andrew. 2007. Regulating Capital: Setting Standards for the International Financial System, Cornell University Press, Ithaca; Simmons, Beth A. 2001. International Politics of Harmonization: The Case of Capital Market Regulation, International Organization, 55 (3): 589–620; Rawi Abdelal. 2007. Capital Rules: The Construction of Global Finance, Harvard University Press Cambridge; Camfferman, Kees and Zeff, Stephen A. 2007. Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee 1973–2000, Oxford University Press, Oxford. 85

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and trading venues. Banking is a policy area in which many of the rules, as discussed in Chap. 7, are created by international financial standards bodies, notably the Basel Committee on Banking Supervision (BCBS), in respect to capital/prudential standards for example. The EU implemented Basel I, Basel II and Basel 2.5 in its Capital Requirements Directives (CRDs), which required transposition by member states into domestic legislation. In the US, the first Basel Capital Accord was published in July 1988 and endorsed in the Federal Deposit Insurance Corporation Improvement Act of 1991.92 Basel II implementation in the US became effective on April 1, 2008, after federal banking regulators published the final regulations.93 In the transatlantic financial markets regulatory relationship, the year 2002 marked a point in which “making mutual adjustments became a routine part of managing conflicts”.94 It was in this year, as discussed later, that the first institutionalized forum dedicated to identifying problems, discussing solutions and negotiating outcomes in respect to transatlantic financial markets regulatory challenges was created, that being the Financial Markets Regulatory Dialogue (FMRD).

International Financial Governance Literature US and EU cooperation of financial regulatory reform in the last decade has been discussed most commonly in respect to international regulation. This has been particularly the case since the global financial crisis in 2008–2009. One of the most prominent questions has been the power shifts between the US and the EU at a time the EU’s single market program had made huge inroads into harmonizing the internal market for financial services.95 As the decade progressed, Europe’s capacity as an actor on the international stage was becoming vastly more significant.96 For example, Posner argued the EU’s role in international financial coordination had been elevated by its centralization of regulatory authority, creating a

 Getter, Darryl E. and Shorter, Gary. 2012. U.S.  Implementation of Basel II.5, Basel III, and Harmonization with the Dodd-Frank Act, Congressional Research Service, February 24. 93  “Risk-Based Capital Standard: Advanced Capital Adequacy Framework—Basel II,”. 2007. Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift Supervision, Treasury, 72 Federal Register 235, December 7. 94  Posner, Elliot. 2009b. “Making Rules for Global Finance: Transatlantic Regulatory Cooperation at the Turn of the Millennium”, International Organization, 63(4): 665–99. 95  Quaglia, L. 2014a. ‘The Sources of European Union Influence in International Financial Regulatory Fora,’ Journal of European Public Policy, 21/3, 327–45; Quaglia, L. (2014b), ‘The European Union, the USA and International Standard Setting by Regulatory Fora in Finance,’ New Political Economy, 19/3, 427–44. 96  Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes Princeton University Press, Princeton, New Jersey. 92

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“Euro-­American regulatory condominium”.97 He examined the seemingly “asymmetric influence wielded by US financial authorities” in negotiations over various financial regulatory disputes, as the US sought to maintain and secure its interests in the European markets and the Europeans sought secure their interests in the US.98 To determine questions of power in negotiations he compared six regulatory disputes in the securities market sector between 1990 and 2008, notably concerning disputes over financial conglomerates, accounting standards, public company auditing, corporate board composition, deregistration of foreign issuers, and stock exchange regulation. Finding that efforts to establish Europe-wide rules changed the expectations of US financial services companies, US agendas and then European firms and authorities, he found the power balance began to tilt more towards the EU. Other research has downplayed the role of the EU, suggesting the EU had emerged as a stabilizing force in global regulatory debates more so than as an innovator.99 It had nevertheless was one of two central nodes in global financial governance, which essentially still was a transatlantic affair. Furthermore, given its special institutional character, the EU still had the potential to transform the modus operandi of global financial governance.100 Other authors have tempered assumptions that the EU had arrived on the world stage as a rival to the US. Quaglia argued that it was the cohesiveness of the EU position that gave it greater analytical leverage rather than alternative explanations based on market size, regulatory capacity and representation in international fora.101 She has also asserted that the degree of EU influence on international standards after the global financial crisis varied across financial services.102

Norms, Values, Principles and Standards Concepts of influence however can be broadened to encompass more than just political influence. As has been well discussed, norms, values, principles and standards embedded in the institutional structure can be just as pervasive in shaping outcomes.103 Such intangible factors often translate into tangible measures, in the form  Posner, Elliot. 2009b. “Making Rules for Global Finance: Transatlantic Regulatory Cooperation at the Turn of the Millennium”, International Organization, 63(4): 665–99. 98  Ibid. 99  Mügge, Daniel. 2013. ‘Resilient neo-liberalism in European financial regulation’, in V. Schmidt and M. Thatcher (eds), Resilient Liberalism in Europe’s Political Economy, Cambridge University Press, Cambridge: 201–25. 100  Mügge, Daniel. 2014. Europe’s regulatory role in post- crisis global finance, Journal of European Public Policy, 21: 3, 316–326. 101  Quaglia, Lucia. 2014. The sources of European Union influence in international financial regulatory fora, Journal of European Public Policy, 21: 3: 329. 102  Ibid, 327. 103  Ruggie, John Gerard. 1983. “International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order.” In International Regimes, edited by Stephen D. Krasner. Ithaca: Cornell University Press: 195–231. 97

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of codes of practice, guidelines, standards for example, that have the effect of reinforcing a particular regime. Frequently such instruments are enforced throughout the global financial system by encouraging, pressuring and even coercing states into adopting global standards.104 The literature on this topic builds on concepts about the structure of the regimes—not only in financial governance but international regimes generally—that arose in the course of debate about neofunctionalist theoretical conceptions of political and economic integration. Later ideas of constructivism, which emerged in the late 2000s and viewed international relations as being the product of historically and socially constructed ideas and norms, also shared the view that states were no longer unitary actors in international relations.105 Scholars have turned to ideas of neoliberalism particularly in the course of finding explanations for international law106 but also in respect to financial markets regulation due to the predominance of liberal market financial firms.107

GFC Literature The study of international financial governance was given a massive boost after the global financial crisis, with the topic examined in depth.108 Literature considered the causes of the financial crisis from a transatlantic perspective, the regulatory aftermath of the global financial crisis,109 international aspects of financial regulation,110 the redesign of the global financial architecture, the legal aspects to financial  Heng, Y.-K. & McDonagh, K. 2008. ‘The Other War on Terror Revealed: Global Governmentality and the Financial Action Task Force’s Campaign Against Terrorist Financing’, Review of International Studies, 34(03): 553–73. Sending, O. J. and Neumann, I. B. 2006. ‘Governance to Governmentality: Analyzing NGOs, States, and Power’, International Studies Quarterly, 50(3): 651–72; Tsingou, Eleni. 2010. “Global Financial Governance and the Developing Anti-Money Laundering Regime: What Lessons for International Political Economy?”, International Politics, 47 (6): 617–37; Dean, M. 2010. Governmentality: Power and Rule in Modern Society, 2nd edition, London: Sage Publications; Hulsse, Rainer. 2007. “Creating Demand for Global Governance: The Making of a Global Moneylaundering Problem”, Global Society, 21(2): 155–78. 105  See Onuf, Nicholas G. (1989), World of Our Making, University of South California Press, Columbia. 106  See Moravscik, Andrew. 2012. in Dunoff, Jeffrey L. and Pollack, Mark A., eds., International Law and International Relations: The State of the Art, Cambridge University Press. 107  See for example Ruggie, John Gerard. 1983. “International Regimes, Transactions and Change: Embedded Liberalism in the Postwar Economic Order”, in Stephen Krasner (ed) International Regimes, Cornell University Press, Cambridge. 108  Moloney, N. (2010) ‘EU Financial Market Regulation After the Global Financial Crisis: “More Europe” or More Risks?’. Common Market Law Review 47: 1317–1383. 109  Ferran, Eilís (2012) The Regulatory Aftermath of the Global Financial Crisis, Cambridge University Press. 110  Stuart P. M. Mackintosh. 2015. The Redesign of the Global Financial Architecture: The Return of State Authority, Routledge. 104

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regulation,111 and the cause of the financial crisis.112 More recently, the proposed Transatlantic Trade and Investment Partnership (TTIP), for which negotiations between the EU and the US began in 2013 but which stopped after US President Donald Trump pulled out, stirred further interest in the transatlantic relationship. Financial services were not included in the proposed deal and Buonanno was among several scholars to point out the complexities in including financial services in a trade deal.113

Conclusion Financial markets regulatory cooperation has been an issue that largely emerged in the literature in the 1990s and the 2000 in response to developments in the US-EU political and economic relationship. Inspired by debate around the role of non-state actors in policymaking, the policy networks into which they fall, transgovernmental and transnational actors specifically and debate around evolving EU governance generally, scholars looked at the transatlantic relationship with a different perspective. The transatlantic relationship is largely unique; it is characterized by complex and high levels of relations at different levels—intergovernmental, transgovernmental and transnational—but with no supranational authority, no loss of national autonomy. It may have been characterized as “shallow integration”114 but it has evolved and become more complex in recent decades. It has been consolidated and institutionalized, and now represents the closest and most intimate international financial markets regulatory cooperative relationship in the world. Scholars have examined specific financial sectors in depth, as well as US and EU power balances in the evolving relationship, and US and EU dominance in the international financial rulemaking environment. Transatlantic financial governance still frequently sets best practice in the multilateral arena,115 making regulatory relations between the US and the EU a key determinant of global financial rulemaking.116

111  Bermann, George A., Herdegen, Matthias, and Lindseth, Peter L. 2012. Transatlantic Regulatory Cooperation: Legal Problems and Political Prospects, Oxford University Press, Oxford. 112  Hira, Anil, Gaillard, Norbert, Cohn, Theodore H. 2019. The Failure of Financial Regulation: Why a Major Crisis Could Happen Again, Palgrave International. 113  Buonanno, Laurie. 2015. “Transatlantic Financial Services Regulation”, in Laurie Buonanno, Natalia Cuglesan and Keith Henderson, The New and Changing Transatlanticism, Routledge, London and New York. 114  Pollack, Mark A. 2005. “The New Transatlantic Agenda at Ten: Reflections on an Experiment in International Governance”, Journal of Common Market Studies, 43, Issue 5: 902. 115  Underhill, Geoffrey, Blom, Jasper, Mugge, Daniel. 2010. “Global Financial Integration Thirty Years on: From Reform to Crisis”, Cambridge University Press, Cambridge: p224. 116  Posner, Elliot. 2009. Transatlantic Regulatory Cooperation at the Turn of the Millennium, International Organization 63, Fall 2009: 665–99.

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Despite some discussion of this in the literature, this is an issue that has not been given the scholarly examination commensurate with the significance of the size and weight of the combined US-EU financial markets in the global economy. This book aims to make a contribution to literature in this respect.

Chapter 2

Background to Transatlantic Relations

More than 75 years after WW2, with US and European markets now highly intertwined and interdependent, the US and the EU routinely negotiate financial regulatory arrangements to facilitate financial markets trade in the transatlantic market. It is a uniquely deep relationship that is not only unrivaled in the world for its complex and multilevel nature, but also its influence on international financial governance. This relationship has evolved steadily and it is one that sits within and effectively steers the global financial rulemaking environment. That the US and Europe dominate this space is no accident. It is the product of deliberative political decision on the part of US and European leadership over successive decades to bind their economies together, to build as US Secretary of State in 1989 said was a “Euro-Atlantic architecture”.1 It is a history of US propagation and ongoing support for European integration, affirmation of the relationship throughout decades amid currency turmoil and despite trade disputes and tensions over the creation of a European Single Market. It is a history of evolution, accommodation, compromise and an interdependence that is now arguably too fundamental to unravel. This chapter provides a background to the evolution of the transatlantic relationship in the postwar period, setting the scene for a much closer cooperative arrangement decades later in the 1990s that involved regulatory cooperation, including cooperation on financial regulatory reform. This was manifested in the multi-level dialogues on financial regulatory reform in the midst and aftermath of the global financial crisis in 2008–2009. This chapter is structured as follows. After outlining depth of US support for European integration in the postwar period, and European interests in a US involved in Europe, it charts the development of milestone agreements including the Transatlantic Declaration on EC-US Relations in 1990,

1  Baker, James A. 1989. “A New Europe, A New Atlanticism: Architecture for a New Era,” speech to the Berlin Press Club, Berlin, Germany, 12 December.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_2

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The New Transatlantic Agenda and associated Joint Action Plan in 1995, and The Transatlantic Economic Partnership (TEP) in 1998. These agreements have framed the transatlantic political and economic relationship that exists today, encompassing financial markets regulatory cooperation. It further discusses the push for transatlantic financial markets regulatory convergence and the development of an institutionalized dialogue and working relationship on financial markets regulatory cooperation in the 2000s.

Historical Context By the time WW2 descended on Europe, the US was already considered by many as “arbiter of Europe’s fate”.2 The pivotal role the US played in coming to Europe’s aid militarily in WWI set the scene for a repeat in WW2. The latter war was even more devastating and tied the two transatlantic economic powers more intimately, in a way that laid the seeds for a complex and multifaceted relationship. Determined to thwart the German war-making machine again, political leadership on both sides of the Atlantic took steps to bring to reality the calls for a more united Europe. Such calls had gone back centuries, but European federalists like Altieri Spinelli and Ernesto Rossi, who had argued for a European federation in the 1941 Ventotene Manifesto,3 widely regarded as the starting point for European federalism, won support for their cause in 1946 when Winston Churchill called for a “United States of Europe”.4 Churchill’s famous speech at the University of Zurich, in which he urged Europeans to unite, to build a united Europe, and to ensure that Germany be “deprived of the power to rearm and make another aggressive war”, signaled the start of what would be become a very different political and economic architecture in Europe. Notably it laid the foundations for the creation of European supranational institutions which, over time, became another level of political authority for the Americans with which to engage. Under the Truman Doctrine, announced in the US Congress by President Harry S. Truman on March 12, 1947, the US pledged to provide political, military and economic assistance to all democratic nations under threat from external or internal authoritarian forces. The Berlin Blockade from June 1948 to May 1949, one of the first major crises of the Cold War, tested US determinations. This led to the signing of the North Atlantic Treaty in April 1949, which created the North Atlantic Treaty Organization (NATO) to provide collective security. The US gave further impetus to its goals when it pledged to contain the Communist uprisings in Greece and Turkey  Stirk, Peter. 1996. A History of European Integration Since 1914, Pinter, London: 1.  Urgesi, Emma (no date) “English Translation of the Ventotene Manifesto” by Altieri Spinelli and Ernesto Rossi, Centre International de Formation Européenn. 4  Churchill, Winston, “United States of Europe”, speech at University of Zurich 19 September 1946, Winston Churchill Foundation https://winstonchurchill.org/resources/speeches/19461963-elder-statesman/united-states-of-europe/ 2 3

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in July 1948. In fact, the broader US strategy was, as Lundestad argues, to come out firmly in support of Western European integration “as comprehensive a scale as possible”.5

US Support for Ongoing European Integration The US was not thrust unwillingly into postwar European engagement. From the US perspective, several objectives could be achieved by supporting a united Europe. It could successfully contain Soviet Communism, help prevent a resurgent Germany and facilitate the integration of European economies into the Atlantic framework.6 The consensus among many historians is that containing Communism was key among the key US priorities at the time. US concerns over the ambitions of a post-­ war Soviet Union are apparent in the famous “Long Telegram” from George Kennan, the minister-counsellor in the US embassy in Moscow, when he wrote in 1946 that the Soviet Union was not interested in peaceful co-existence and that containment was imperative.7 As Lundestad argues, it is for this reason that the US supported the formation of key European institutions (and later GATT).8 Limiting Communism was not just an objective in Europe but also worldwide. As such, post-­ war Europe formed just part of the US broader policy of the global Communist containment. As Gilbert has argued, US policymakers saw European integration as “part and parcel” of their wider plans.9 At the same time, the appetite for federalism in Europe, ideas well established prior to the war, gained pace in the immediate post-war period. European federalists were eager to push their plans forward and looked to US assistance to do so. The Marshall Plan was the principal framework by which the US interests became intimately entangled Europe for decades to come. Officially the European Recovery Plan, was established with the signature of President Harry Truman on April 3, 1948, after the passage through the US Senate of the Foreign Assistance Act. The plan, under which approximately US$13 billion worth of economic grants and loans were extended to 16 European countries, aimed to restore European industrial and agricultural production, boost trade and maintain market stability.

5  Lundestad, Geir. 2003. The United States and Western Europe since 1945: From “Empire” by Invitation to Transatlantic Drift, Oxford University Press, Oxford and New York: 1941. 6  Ibid, 1910. 7  Cowles, Maria and Egan, Michelle, “The Evolution of the Transatlantic Partnership”, Transworld working paper 3, September 2012. 8  Lundestad, Geir. 1998. Empire by Integration: The United States and European Integration 1945–1997, Oxford University Press: 38. 9  Gilbert, Mark. 2010. “Partners and Rivals: Assessing the American Role”, in Kaiser, Wolfram and Varsori, Antonio, European Union History: Themes and Debates, Palgrave Macmillan, London and New York: 171.

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Also funded under the plan was the Organisation for European Economic Cooperation (OEEC), an organization formed in 1948 following the Conference of Sixteen (Conference for European Economic Co-operation), a conference involving 16 nations, which aimed to establish a permanent organization to manage the recovery programme, coordinating the distribution of aid as well as internal European production, financial stability, joint economic co-operation, and balance of payments. This institutionalization formed the basis of what would become the process of European integration. The same year also saw 800 delegates from European countries meet at a grand Congress of Europe in The Hague, with Churchill as honorary president. The key outcome was the creation of the Council of Europe the following year on May 5, 1949.10

Emergence of Supranational Europe In Europe, federalists were eager to engage a plan that would prevent a revival of Germany’s war-making capacity. French foreign minister Robert Schuman in a speech on May 9, 1950, known as the Schuman Declaration, outlined a plan to nationalize the coal and steel making industry in the Ruhr region, a mining region in Germany that was the cradle of heavy industry and had been used by Germany for its war machine in successive wars. After the war, the Allies had placed the area under an International Authority, which was responsible for controlling coal and steel production and controlling domestic consumption and exports. Jean Monnet, the Commissioner-General of the French National Planning Board at the time, pushed for the creation of a European Coal and Steel Community (ECSC). The ECSC was brought into being on 18 April 1951. With the US capital markets virtually closed to European businesses, the US Government was the most likely choice in the search for financial assistance. Monnet, who had negotiated loans from the Americans for France in 1944,11 helped secure US$100  million in US loans for the ECSC.12 The US engagement in Europe though the Marshall Fund and the support of the ECSC laid the foundation for a closer US-European economic and political cooperation and, moreover, for an institutionalization of the US role in Europe. The ECSC became the basis for what would later become the European Economic Community (EEC) in 1957, which in turn became the European Union in 1993 under the Maastricht Treaty. As such, the very birth of European integration was partly the product of, and very much supported by, US foreign policy objectives.  The Council of Europe is not an institution, rather an international organization created to uphold human rights, democracy and the rule of law, with 47 member states, 27 of which are EU states. 11  Hill, John S. 1992. American Efforts to Aid French Reconstruction between Lend-Lease and the Marshall Plan, The Journal of Modern History, 64, No. 3: 500–524. 12  Rappaport, Armin. 1981. The United States and European Integration: The First Phase, Diplomatic History, 5, No. 2: 121–149. 10

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Throughout the 1950s and 1960s, US interests in the economic and industrial fortunes in Europe continued, with the US continuing its support for European integration and promoting it as a foreign policy tool. The 1950s saw European integration progress at a pace amid growing support for European federalism. In 1951, the Treaty of Paris created the European Court of Justice, which was established the following year, while the General Agreement on Tariffs and Trade (GATT) granted Belgium, France, Germany, Italy, Luxembourg and the Netherlands a derogation from the most-favoured-nation treatment, to allow them to fulfil their ECSC obligations. The following year, Belgium, France, Germany, Italy, Luxembourg and the Netherlands removed custom duties, and a common market for scrap iron was put into place. In 1956, the Spaak Report presented a proposal for a common market, a customs union and common policies to the six ECSC member states. The following year, two treaties were signed to create two new communities: The Treaty establishing the European Economic Community (EEC)13 and the Treaty establishing the European Atomic Energy Community (EAEC or Euratom). These new communities represented a significant evolution in the march towards European political unity.14 The year 1957 also saw another significant development in the international arena that maintained US ambitions in Europe. The Soviet Union launched Sputnik, the world’s first artificial satellite, a move that prompted US President Eisenhower to authorize the establishment of NASA, which in turn led to the space race. These developments created strong incentives for the US to continue its support for the process of European integration. Its desire to contain Communism and maintain its lead against the Soviet Union in the midst of the Cold War and its concerns over trade kept the US engaged in Europe. The Americans even felt, Lundestad argues, that Europe would not be entirely independent but would be “fitted into a wider Atlantic framework”.15 Jean Monnet, in his instrumental role in creating the European Community, is said to have observed that the US had been the first power in history to back the creation of a larger power instead of ruling by dividing.16 In fact, such was the level of enthusiasm that Winand argues US government representatives even “co-conspired” on the European integration project with Monnet, because they all “believed fervently” in the dream of the long-held United States of Europe. A united Europe, they felt, was as important to Americans as it was to Europeans.17  The Treaty establishing the European Economic Community (EEC) is also referred to as the Treaty of Rome and both treaties are also referred to as the Treaties of Rome. 14  The three economic associations, the European Economic Community (EEC), the European Coal and Steel Community (ECSC), and the European Atomic Energy Community, became collectively known as the European Community (EC). 15  Ibid. 16  Duchene, Francois. 1994. Jean Monnet: The First Statesman of Interdependence, WW Norton and Company, New York: 386. 17  Winand, Pascaline. 1993. Eisenhower, Kennedy, and the United States of Europe, Macmillan, London: 146–7. 13

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The Changing Trade Relationship In the 1960s, the US became increasingly conscious about the impact of the EEC on the US trade position in the world. The then-EEC could now compete with the US in the international in trade negotiations. There were growing concerns in the US that US businesses might be shut out of the European market. This was a primary concern during the Dillon Round of GATT trade negotiations from 1961 to 1963 for example. It was also a concern held by the non-EEC European members at the time.18 During the Kennedy Round of the GATT negotiations from 1964 to 1967, a major US objective remained to keep the European market open to US farmers.19 This was made complex for the Americans by differences among common market countries over farm policy. This would become an enduring issue for the US as European integration gathered pace. At the same time, the containment of Communism remained a pre-eminent US priority. In an address given in Philadelphia on July 4, 1962, Kennedy said the US had everything to gain from “a concrete Atlantic partnership, a mutually beneficial partnership. We do not regard a strong and united Europe as a rival but as a partner,” he said.20 This had been the basic object of the US foreign policy for 17 years. Overall, under President Kennedy, there was a renewed push to engage with a growing Europe. At a time of financial strain in the US, and in an effort to persuade continental Europe to take international pressure of the US, Kennedy was said to have told his Deputy Special Assistant for National Security Affairs that the only leverage the US really in had in Europe was nuclear knowledge and capability and that “in the 1950s [the Europeans] spent their time making money; we spent our time making bombs”.21 His advisor had told him that the goal was to “lead them in a process looking towards partnership”. During the 1960s and 1970s ongoing European integration was met with varying degrees of enthusiasm by successive US administrations. Despite the highs under Presidents Eisenhower and Kennedy, later political posturing by French President de Gaulle made for a challenging relationship with the EEC. This was made even more difficult with the creation of a customs union in the EEC in 1968.22 The 1970s saw even greater European integration and ongoing US support, although the US economic relationship with Europe began to change indefinitely. Europeans had long been concerned about European reliance on US fortunes. Belgian economist Robert Triffin, a critic of the Bretton Woods system, a supporter

 “Special Report: GATT and the Kennedy Round”, US Central Intelligence Agency, 24 April 1964.  Ibid. 20  “President John F. Kennedy Address at Independence Hall”, Philadelphia, Pennsylvania, July 4, 1962, John F. Kennedy Presidential Library and Museum, Boston, Massachusetts. 21  “Walt W. Rostow Oral History Interview JFK#1, 4/11/1964 Administrative Information”, April 11, 1964, Washington DC, John F.  Kennedy Presidential Library and Museum, Boston, Massachusetts. 22  Lundestad, op. cit.: 97. 18 19

Towards European Monetary Independence

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of European integration and proponent of the European monetary system, had warned in the 1960s of the vulnerability of the transatlantic link and over-reliance on the US dollar.23 Coining an idea known as the Triffin Paradox, he warned of the dangers of linking long-term European stability to the short-term financial fortunes of one country. His warnings turned out to have merit, with instability and wild currency fluctuations throughout the EEC prompting the European Commission in 1968 to propose a review of the policy on economic and monetary coordination. The problems had undermined the EC’s common agricultural policy common price system.24

Towards European Monetary Independence The currency crisis in the mid 1970s provided impetus to the campaign for European monetary independence from the US and the creation of European monetary union. There were calls for a European Reserve Fund to ward off future shocks and detach Europe from, as Dyson argues, the “cracks that were opened by a reluctant and retreating US hegemon”.25 When in 1971 US President Richard Nixon announced a “temporary” suspension of the dollar’s convertibility into gold to support the dollar, a consequent debt crisis in Europe prompted European governments to renew the push for an alternative. With Europeans looking for solutions to the intensifying economic problems, an agreement was reached in April 1972 called the Basel Agreement that sought to stabilize exchange rate relations between currencies. Under the agreement, the six EEC members agreed to peg their currencies to the US dollar, allowing a fluctuation of just 2.25%. However, what subsequently became known as the “Snake in the Tunnel” agreement26 barely functioned. The very start of the year 1973 saw Denmark, Ireland and the United Kingdom joining the European Communities and just two months later the US floated its dollar. The 1973 oil crisis, that started in October of that year when the Organization of Arab Petroleum Exporting Countries announced an oil embargo in response to US support of Israel, led to a stock market crash in 1973–1974. This aggravated inflationary pressures and balance of payments problems in Europe.27 Pressure remained

 Triffin, Robert. 1960. Gold and the Dollar Crisis: The Future of Convertibility, Yale University Press, New Haven. 24  European Commission, “Phase 1: The Werner Report”. 25  Dyson, Kenneth. 2008. “50  Years of Economic and Monetary Union: A Hard and Thorny Journey”, in Phinnemore, David and Warleigh-Lack, A. (eds), Reflections on European Integration, Palgrave, London: 148. 26  The “snake” referred to the European currencies and the tunnel referred to the narrow limits of the US dollar. 27  Papaspyrou, Theodoros. 2004. “EMU Strategies: Lessons from Greece in View of EU Enlargement”, paper presented at the Hellenic Observatory, The European Institute, London School of Economics, 20 January. 23

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on European countries to leave the pegged system—the Italian Lira in 1973, the French Franc in 1974 and, after re-integration in 1975, again in 1976, the Swedish Kronar in 1977 and the Norwegian Kroner in 1978. After the collapse of the Bretton Woods system, particularly during 1973–1976, European public finances and employment rates deteriorated, leading to a second attempt at economic and monetary integration in 1979 with a system that aimed to set up a zone of monetary stability. Meanwhile US security priorities continued to manifest in Europe. In 1975, the Conference on Security and Co-operation in Europe (CSCE) held in Helsinki led to the formation of the Organization for Security and Co-operation in Europe (OSCE), a forum for countries in the east and west to further joint security goals. A manifestation of détente policy between the US and Europe and the eastern bloc, it sought to reconcile the sharply different approaches of the two sides in the Cold War.28 In 1977, a new proposal for economic and monetary integration was put forward by the-then president of the European Commission, Roy Jenkins. This led to the European Monetary System in March 1979 that created the European Currency Unit, a currency unit based on a weighted average of EMS currencies—which formed the basis of the monetary union today. These developments strained relations with the US and signaled the start of what would become a new era in European financial independence. From the US perspective, Europe was not only an independent player in the world of trade; it was also moving towards its own currency and this had significant consequences for not only US interests in Europe, but also the place of the US dollar as a reserve currency. President Reagan was elected in late 1980, ushering in new hope and a renewed push for US ambitions in the world, as well as a confident pro-trade policy.29 For the first time in decades, the US Administration had been unashamedly free trade, as opposed to liberal trade. The new Reagan Administration also took a much more aggressive stance with the Soviet Union. Reagan took the Russians on, planning to deploy 572 new American medium-range missiles in Western Europe, leading to major tensions in Europe and globally. At the same time, Europe saw further momentum towards economic integration. Greece joined the EC in 1981, making ten members, and Spinelli, one of the prominent European federalists, tabled a motion for the European Parliament to create a special committee to draft a proposal for a new treaty on a closer union. Reagan’s trade approach inevitability led to a clash with the EEC. The Europeans were keen to avoid jeopardizing their trade and diplomatic relations with the Soviet Union and significant political differences of opinion came to the fore.30 There were also major differences of opinion between the US and the EEC in respect to the  Lehne, Stefan. 2015. “Reviving the OSCE: European Security and the Ukraine Crisis”, Carnegie Europe. 29  Cooper, R. (1989). An Appraisal of Trade Policy during the Reagan Administration. Harvard International Review, 11(3), 90–94. 30  Gwertzman, Bernard. 1981. “U.S. ‘Regrets’ Soviet Press Attacks On Reagan’s Plan To Curb Missiles”, New York Times, 20 November 1981. 28

US-EU Economic Interdependence

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Middle East, Central America, Poland and Siberian natural gas.31 The trade relationship was complicated, not only by the EEC’s improving trade profile in the world, but by US concerns about the European Common Agricultural Policy. It was also complicated by the fact that the start of 1980 saw the start of a US recession amid a growing US trade deficit and rising US protectionism. Later in February 1984, the European Parliament adopted the Draft Treaty Establishing the European Union, produced by the Committee on Institutional Affairs that had been established in 1982 with Spinelli at the lead. While the treaty failed to gain popular support, it propelled integration even further and led to negotiations which led to the Single European Act of 1986 and the Maastricht Treaty of 1992, which established the European Union. In this context, while the US continued to support the process of European integration, its relationship and view of an integrating Europe changed somewhat and became imbued with concerns and protectionism. It was an era in which the relationship became, as Pollack notes, more combative.32 Enthusiasm for European integration essentially reached lows during the Reagan Administration.33

US-EU Economic Interdependence A major feature of the three decades after the war was rapidly growing US-European economic interdependence. In the post-war era, Featherstone and Ginsberg characterize the evolving US-EU economic relationship in three distinct phases.34 The first, from 1945 to 1965, saw the US as the world’s dominant economic power. There was very little cross-border investment between the US and Europe at the time. The second, from around 1966 to 1986, came amid declining US economic dominance. Cross-border flows picked up, as did US protectionism, with around one third of US manufactured goods protected by non-tariff barriers. At the same time, transatlantic investment accelerated with foreign direct investment between the US and the then European Community growing fivefold between 1977 and 1984 from US$34.6 billion to US$159.6 billion.

 Winand, Pascaline and Philippart, Eric. 2001. “From Equal Partnership to the New Transatlantic Agenda: Enduring Features and Successive Forms of the US-EU Relationship”, in Philippart, Eric and Winand, Pascaline (eds). 2001. Ever Closer Partnership: Policymaking in US-EU Relations, PIE Peter Lang, Brussels: 40. 32  Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 9. 33  Winand, Pascaline and Philippart, Eric. 2001. “From Equal Partnership to the New Transatlantic Agenda: Enduring Features and Successive Forms of the US-EU Relationship”, in Philippart, Eric and Winand, Pascaline (eds). 2001. Ever Closer Partnership: Policymaking in US-EU Relations, PIE Peter Lang, Brussels. 34  Kevin Featherstone, and Roy Ginsberg. 1996. The United States and the European Union in the 1990s: Partners in Transition, Macmillan Press Ltd., London. 31

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The third phase, after 1986, was characterized by the relative strength of the US increasingly being matched by the growing strength of a politically and economically united Europe. By the mid-1990s, the US and the European Community were on fairly equal economic footing, with a relatively balanced trade relationship in terms of exports and imports of similar products and a reciprocal foreign direct investment relationship.35 By 1996, Featherstone and Ginsberg argued the US and the EU had become “profoundly interdependent” economically.36 By 2001 transatlantic direct investment was worth US$700 billion. Some historians have suggested that the construction of interdependent transatlantic economies was part of a deliberate strategy to secure European interests. In his  book, The Reconstruction of Western Europe, 1945–1951, Milward argued Europeans largely constructed an “institutionalized pattern of interdependence” in Western Europe as a “better basis” for building peace and stability than by comprehensive regulation by treaty.37 In his later book European Rescue of the Nation-State on the origins of the European Community, he argued that a European push for greater transatlantic political and economic coordination was underpinned by a belief among European political leaders at the time that traditional conceptions of the nation-state had failed in Europe.38 While the explanations for progressive US-European interdependence have been the subject of vigorous academic debate, the reality is that the evolving close relationship has been subject to a range of causal factors since WW2. No single political development or economic development, and no single US Administration or European preference is consistent over this period. A closer US-European relationship is arguably the result of a confluence of factors.

Origins of a Bilateral Financial Markets Relationship Prior to the 1960s, few US banks owned subsidiaries abroad. Until the 1970s, there were extensive controls on capital movements in most major industrial countries as was permitted under the Bretton Woods Agreement. Throughout the 1960s, 1970s and 1980s, as transatlantic trade and foreign investment levels expanded, so did the number of multinationals that established foreign branches. US and European banks followed their corporations around the world and established branches across the globe, notably in each other’s markets.39 Controls on international capital  Pollack, Mark A. and Shaffer, Gregory C., Transatlantic Governance in the Global Economy, Rowman & Littlefield, Minnesota Legal Studies Research Paper No. 10–25: 13. 36  Featherstone, Kevin, and Ginsberg, Roy. 1996. The United States and the European Union in the 1990s: Partners in Transition, Macmillan Press Ltd., London. 37  Milward, Alan S. 1984. The Reconstruction of Western Europe, 1945–1951, University of California Press, Berkeley and Los Angeles: 463. 38  Milward, Alan S. 1992. European Rescue of the Nation-State, Routledge, London. 39  Cranston, Ross. 2002. Principles of Banking Law, 2nd ed, Oxford University Press, Oxford. 35

Origins of a Bilateral Financial Markets Relationship

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movements began to be dismantled in the 1970s to such a point that they were virtually eliminated in the 1980s and consumers in all major and most small industrial countries could acquire foreign assets.40 International banking expanded dramatically as a consequence of enormous growth in world trade and foreign direct investment, with banks expanding their securities, mergers and acquisitions, fund management, and derivatives activities. During the 1970s, banks established subsidiaries around the world, building assets worth US$39 billion by 1975 and more than US$80 billion by 1980.41 From the late 1960s to the mid-1970s, US banks invested in Europe particularly, with European branches accounting for 60% to almost 80% of all US foreign branch assets. Other factors spurred on international banking too, particularly in Europe. Telecommunications technology improved, reducing costs and boosting the level of financial transactions.42 It has been said that the world monetary system underwent three revolutions all at once: deregulation, internationalization and innovation.43 During this period, US and European relations on financial matters mostly took place in the context of the multilateral rules environment. In the area of banking, members of the General Agreement on Tariffs and Trade (GATT) were afforded most-favoured nation treatment, meaning countries could not normally discriminate between their trading partners, and obliged a country to accord no less favourable treatment to the banks in one foreign country than another. There were few major conflicts in respect to market access disputes the area of banking and financial institutions until the 1980s.44 The EEC had yet to develop a comprehensive financial services policy and begin the process of harmonizing internal European rules and the US maintained bilateral relationships with key European economies, the UK, France, West Germany among others. However, the 1980s saw a number of gradual changes. Firstly, the European Commission’s plans to develop the European single market gathered pace. The signing of the Single European Act in February 1986  in Luxembourg and The Hague, a year that also saw Spain and Portugal joining the European Community, raised the stake for US firms even further. Entering into force on July 1, 1987, it set the scene for a single set of European banking rules that would present major challenges to the US in terms of continuing to do business in Europe. The Act consolidated the “four freedoms”: freedom of movement of goods, services, people and capital.45 It was a development that exaggerated US concerns that access to the European market might be compromised.  Turner, Philip. 1991. Capital flows in the 1980s: a survey of major trends, BIS Economic Papers, Bank for International Settlements, No 30, 01 April. 41  Federal Reserve Bulletin September 1999: 599. 42  Cranston, Ross. 2002. Principles of Banking Law, 2nd ed, Oxford University Press, Oxford: 424. 43  Turner, Philip. 1991. Capital flows in the 1980s: a survey of major trends, BIS Economic Papers, Bank for International Settlements, No 30, 01 April. 44  Cranston, Ross. 2002. Principles of Banking Law, 2nd ed, Oxford University Press, Oxford: 435. 45  The Single European Act also codified European Political Cooperation, the forerunner of the European Union’s Common Foreign and Security Policy (CFSP). 40

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As the EU began to roll out legislative reforms and amid its elevation on the world stage, particularly in the area of trade, bilateral negotiation on the part of the US became more important. The EEC’s introduction of its first piece of banking legislation as part of preliminary efforts to harmonize the internal EEC market heightened the importance of bilateral dialogue. The First Banking Coordination Directive, introduced in 1977, required member states to introduce legislation to dismantle market access barriers between member states. The directive allowed EEC credit institutions to establish branches in other member states, create uniform rules concerning essential authorization requirements for credit institutions, and rules on supervisory standards among other areas, it created the basis for the harmonization of banking laws throughout the EEC.46 With this, US banks and the US government began to look to Brussels to seek assurances that US firms would not be excluded from the market. Secondly, the US-European power balance in the area of trade began to pivot away from the US towards Europe. In the late 1980s, the US exported more to Europe than any other region and it was conscious of the EEC’s growing place in world trade. The rules in the multilateral trading environment had functioned sufficiently well up until the late 1980s. However, the multilateral trade environment began to break down. GATT negotiations proceeded at a glacial pace in the 1990s as both the US and the EU sought to pursue their trade interests on bilateral levels.47 The US, the largest world economy, increasingly turned to bilateral and plurilateral trade deals to optimize its trade interests. The Canada-United States Free Trade Agreement in 1988 was broadened to include Mexico and became the North American Free Trade Agreement (NAFTA) in 1994. Such a major deal sent a strong signal to international partners that the US was losing confidence in the multilateral environment. The EU also sought to establish bilateral deals such as its negotiations for a Free Trade Agreement with the countries of the Gulf Co-operation Council (GCC) in 1991.

A US “Seat at the Table” of EU Rulemaking Some scholars have attributed these shifts to a change in US political preferences for bilateral and unilateral arrangements as its strength in the global economy widened48 and others to a proliferation of regionalist projects.49 This trend continued in

 Gruson, Michael and Nikowitz, Werner. 1988. “The Second Banking Directive of the European Economic Community and Its Importance for Non-EEC Banks”, Fordham International Law Journal, 12, Issue 2. 47  Baldwin, Richard. 2008. “Big-Think Regionalism: A Critical Survey”, National Bureau of Economic Research Working Paper Series, Working Paper 14056. 48  Ikenberry, G. John. 2003. “Is American Multilateralism in Decline?”, Perspectives on Politics, 1, No. 3: 533–550. 49  Whalley, John. 2008. “Recent Regional Agreements: Why So Many, Why So Much Variance in Form, Why Coming So Fast, and Where Are They Headed?”, The World Economy, 31, Issue 4: 517–532. 46

The Emergence of Financial Markets Regulatory Cooperation

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subsequent decades, with the US also opting out of several multilateral arrangements or refusing to sign new pacts, such as its failure under George W. Bush in 1999 to ratify the Comprehensive Test Ban Treaty that Clinton had signed in 1996. Under Bush, the US also rejected multilateral agreements such as the Kyoto Protocol. Thirdly, the EEC and from its formation in 1993 the EU, began to establish itself as a dominant player in the international rulemaking environment.50 The US had held a hegemonic position in international standards-setting and financial institutions51 and to date had seen no need to establish separate channels of cooperation with Europe. It had “shaped the system as much as the system shaped it” and possessed greater leeway for autonomous action more than any other country throughout the 35  years after WW2.52 Partly this was the result of neoliberal norms and principles associated with the “Washington consensus” having been institutionalized within the key international financial institutions (IFIs). Agreements on financial matters can aim to facilitate cross-border financial markets activity and to this end agreements on technical standards, standardized contracts, codes of conduct, harmonized accounting and disclosure standards, custodial services, and other legal conventions are useful.53 As the EEC progressed with legislation to harmonize the single market, European standards, such as its adoption of International Financial Reporting Standards instead of the US GAAP accounting standards, began to pose major problems for US businesses and financial institutions. In 1989, US Secretary of Commerce Robert Mosbacher even suggested that the US should be given “a seat at the table” as an observer of internal EU discussions about European standards setting.54 This highlights the degree to which a diverging EU-US standards environment was creating a problem that the US increasingly wanted to address.

The Emergence of Financial Markets Regulatory Cooperation Despite successive agreements between the US and the EEC/EU, financial services were still not on the agenda at intergovernmental level. The Commission had been keen on some form of mutual recognition in financial services for several years. The

 Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes Princeton University Press, Princeton, New Jersey. 51  Beeson, Mark and Bell, Stephen. 2005. “The G20 and the Politics of International Financial Sector Reform: Robust Regimes or Hegemonic Instability?” CSGR Working Paper No. 174/05 September: 7; Bhagwati, Jagdish. 1998. ‘The capital myth’, Foreign Affairs, 77 (3): 7–12. 52  Keohane, Robert. 1984. After Hegemony: Cooperation and Discord in the World Political Economy, Princeton University Press, Princeton: 26. 53  White, William R. 2012. “International Agreements in the Area of Banking and Finance: Accomplishments and Outstanding Issues”, in George M. von Furstenberg (ed) Regulation and Supervision of Financial Institutions in the NAFTA Countries and Beyond, Springer, New York: 50. 54  Peterson, John. 1996. Europe and America: The Prospects for Partnership, Routledge, New York: 47; Pine, Art (1989), “The White House Softens Its Tough Trade Rhetoric”, Los Angeles Times, June 4, 1989. 50

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measures it envisioned included mutual recognition of mutual funds for cross-­ border marketing between the US and the EU, which had been a long-standing EU request from the EU asset management industry, as well as the mutual recognition of prospectuses for public offers of securities and stock exchange listings. However, in mid-1998, the European Communities lacked neither a single financial markets supervisory framework nor an effective mechanism to respond to financial markets challenges. Further, there was no clear Europe-wide regulation on a large number of issues (for example prospectuses, cross border collateral, market abuse, investment service provision), which prevented the implementation of a mutual recognition system. The system was restrained by inefficient regulation, inconsistent implementation, in part due to lack of an agreed interpretation of the rules that do exist, disparate transaction and clearing and settlement systems that fragmented liquidity and increased costs, especially for cross-border clearing and settlement.55 Moreover, there were differences in legal systems, differences in taxation, political barriers, external trade barriers (e.g., EU trading screens are not authorized in the US56) and vast cultural differences among member states. These issues were among the market challenges tackled by the extensive financial markets reform program set to be rolled out. The European single market program plans were underway and concerns among US financial institutions about market remained acute. The European Second Banking Directive, adopted in 1989, aimed to harmonize banking supervision throughout the EC through the principles of home state control and the mutual recognition by the member states of the regulatory framework and its application to the banking system. The directive required member states to implement the measures by the end of 1992, so that member state banking supervisory authorities could rely on each other’s banking supervision from the outset of 1993. The legislation, along with related directives on bank capital and solvency ratios, harmonized the system of prudential supervision necessary for banking stability, and regulated the licensing and operation of banks based in one member state in another. The legislation was set to change the way non-EEC banks did business in the US, by aiming to promote the growth of EEC banks and make them stronger in the world market and, importantly, establish a reciprocity test for non-EEC banks before they could do business in Europe.57 For the US, there was the risk that US banks not already operating in the EEC member states would not be able to operate as the Directive necessarily discriminated against non-EEC banks.58

 Lamfalussy, Alexandre. 2001. “Final Report of the Committee of Wise Men on the Regulation of European Securities Markets”, Committee of Wise Men: 10. 56  Posner, Elliot. 2009. “Making Rules for Global Finance: Transatlantic Regulatory Cooperation at the Turn of the Millennium”, International Organization 63, Fall 2009: 665–99. 57  Gruson, Michael and Nikowitz, Werner. 1988. “The Second Banking Directive of the European Economic Community and Its Importance for Non-EEC Banks”, Fordham International Law Journal, 12, Issue 2: 207. 58  Ibid. 55

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Financial Services Action Plan At the EU Summit earlier in 1998, the European Council asked the Commission to prepare a plan for legislative reform as part of the preparations for the euro. In October, the Commission laid out its plan for comprehensive reform as requested. It proposed notably the creation of a single structured cooperation mechanism between member states financial markets supervisory authorities and the creation of a consultative group to develop more detailed plans.59 This saw the subsequent creation of a Financial Services Policy Group, comprised of EcoFin ministers, Commission representatives and representatives of the ECB, to identify priorities for financial markets reform. Prudential legislation for the single financial services market, the Commission said, did “not require radical surgery”. Several months later it revealed five key priority areas and the following year announced a huge legislative program involving 42 specific reform actions.60 The proposed FSAP reforms encompassed new EU-wide rules on banking, insurance, securities, mortgages, pensions and other forms of financial transactions, with the key objective to create a single wholesale market, an open and secure retail market, common prudential rules and a pan-EU supervisory framework. This included legislation to harmonize member states’ laws, regulations and administrative provisions. It was intended that by 2004 the reforms would fill regulatory and legislative gaps throughout the EU and remove the remaining barriers to a single market in financial services as a whole. Some of the initial specific proposals were:61 • Upgrading the Directives on Prospectuses • Updating the Directive on Regular Reporting • Issuing a Commission Communication on distinction between “sophisticated” investors and retail investors • A Directive to address market manipulation • Updating the EU accounting strategy • Modernisation of the accounting provisions of the 4th and 7th Company Law Directives • Implementation of a Settlement Finality Directive • A Directive on cross-border use of collateral • Review of EU corporate governance practices • Amending the 10th Company Law Directive • Introduction of a 14th Company Law Directive on cross-border transfer of seat • Commission Communication on Funded pension Schemes • Political agreement on the proposed directives on UCITS

 “Financial services: Building a Framework for Action”, Communication of the Commission, European Commission, 28 October 1998. 60  Communication of the Commission, Implementing the Framework for Financial Markets: Action Plan, COM(1999)232, 11 May 1999. 61  Ibid. 59

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• Political agreement on proposal for a Directive on the Distance Selling of Financial Services • Commission communication codifying clear and comprehensible information for purchasers • Commission green paper on an ecommerce policy for financial • Recommendation to support best practice in respect of information provision (mortgage credit) • Commission report on substantive differences between national arrangements relating to consumer-business transactions • Interpretative Communication on the freedom to provide services and general goods in insurance • Proposal for amendment of Insurance Intermediaries Directive • Commission Communication on a single market for payments • A regulation on Cross-Border Payments in Euro (added later) • Commission Action Plan to prevent fraud and counterfeiting in payment systems • Adopt a proposed directive on the winding-up and liquidation of insurance undertakings • Adopt the proposed directive on the winding-up and liquidation of banks • Adopt the proposal for an Electronic Money directive • Amendment of the money laundering directive • Commission Recommendation on disclosure of financial instruments • Amend the directives governing the capital framework for banks and investment firms • Amend the solvency margin requirements in the insurance directives • A proposal to amend the insurance directives and the ISD to permit information exchange with third countries • The development of prudential rules for financial conglomerates following the recommendations of a “Joint Forum” • The creation of a Securities Committee • To adopt a Directive on Savings Tax • The implementation of the December 1997 Code of Conduct on business taxation

Formalizing Financial Regulatory Cooperation: FMRD 2002 The role out of the FSAP program was the beginning of a multichannel US-EU dialogue specifically on financial markets regulatory cooperation. It was critical to the single market program and the introduction of a common currency. For the US, it raised a whole set of new technical barriers, which from its point of view had to be managed. “Well-managed, the FSAP offers a clear ‘win-win’ opportunity for Europe, the United States, the world economy and US financial institutions,” Randal K. Quarles, US Assistant Secretary of the Treasury for International Affairs, told the European Institute Transatlantic Seminar on Trade and Investment, in Washington, DC in December 2002. The US was very much aware that in the area of securities

Formalizing Financial Regulatory Cooperation: FMRD 2002

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and banking and insurance, the newly created Committee of European Securities Regulators (CESR) and Committee of European Banking Supervisors (CEBS), created in June the previous year, represented a shift in financial supervisory authority to EU level, which heightened the potential for pan-European regulation. At the same time, a number of US legislative initiatives had created problems for EU companies operating in the US. The Gramm-Leach-Biley Act in 1999, part of the Patriot Act in 2001, had removed restrictions on banks, securities and insurance companies from operating any combination of investment banking, commercial banking, and insurance and paved the way for greater financial services competition for EU financial institutions operating in the US. On 30 July 2002, the US introduced the Sarbanes-Oxley Act, enacted as a response to the Enron, Arthur Andersen and the other US financial scandals.62 The Act expanded and created new requirements for all US public companies around director appointments and standards, financial reporting, accounting requirements. It created criminal penalties for a range of types of misconduct and gave greater authority to the SEC to issue binding regulations as to compliance.63 The Act was a landmark overhaul of US corporate and capital market legislation and applied to all companies listed on US stock exchanges, including many of Europe’s largest companies whose shares were traded on US exchanges in the forms of American Depository Receipts (ADRs).64 It imposed among other things new auditing, corporate governance, internal control and financial disclosure requirements. For example it required audit committees to be independent and auditors to be registered with the new US Public Company Accounting Oversight Board.65 Importantly, the Act had extraterritorial effects and applied to non-US companies which had accessed the US capital markets as well as multinational companies with subsidiaries in the US.  EU businesses were highly concerned about the Act’s effects.66 As the legislation made no distinction between domestic and foreign private issuers and auditing firms, it was felt that if foreign issuers and auditing firms were subject to robust measures in their home markets, then double regulation would impose an unnecessary burden and cost.67 The Commission raised concerns about

 Securities and Exchange Commission. 2002. The Office of International Affairs, Annual Report 2002, Washington DC. 63  The Sarbanes-Oxley Act 2002. 64  ADRs are “mirror” stocks that are often underwritten by US banks and effectively allow US investors to buy and trade shares in foreign companies on US stock exchanges. 65  Hellwig, Hans-Jurgen. 2012. “The Transatlantic Financial Markets Regulatory Dialogue”, in Hopt, Klaus J.; Wymeersch, Eddy; Kanda, Hideki; Baum, Harald, Corporate Governance in Context: Corporations, States, and Markets in Europe, Japan, and the US, Oxford Scholarship Online, March. 66  Edser, Nick. 2002. “Fraud Law Set to Hit UK Firms”, BBC News, 15 August 2002. 67  “The U.S.-EU Positive Economic Agenda on Financial Markets Issues: Remarks by U.S. Assistant Secretary of the Treasury for International Affairs Randal K.  Quarles”. 2002. The European Institute Transatlantic Seminar on Trade and Investment, Washington, DC December 10, 2002, US Treasury Press Release. 62

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what it saw as the “unwarranted effects” of the legislation and identified seven categories of issues to be resolved through discussion, namely: registration of EU audit firms, US access to EU audit working papers, auditor independence, audit committee requirements, loans to directors, certification of financial reports and certification of internal controls.68 EU officials also saw the need for mutual recognition of rules governing corporate board composition to eliminate the potential undesirable effects of incompatible regulations.69 The reforms caused considerable difficulties for European stakeholders and appeared to many companies as being heavy-handed.70 European companies were also concerned about requirements for EU companies that wanted to deregister from US exchanges. This added to existing challenges around the quite different US and international accounting standards, the latter of which had been embraced in Europe. The creation of the Financial Markets Regulatory Dialogue (FMRD) as part of the US-EU commitments under the framework of the Transatlantic Economic Partnership signed in 1998, institutionalized financial markets regulatory dialogue for the first time. Decided and effectively formed at the EU-US Summit in Washington in May 2002, it became the primary forum for regulatory discussion on financial reform between the US and the EU.71 Up until the late 2000s, banking systems, financial markets, business relationships, trade levels had become so interconnected that it was inevitable that problems in one market would inevitably affect the other. Economies, financial systems, large corporations and banks had become connected via mutual exposures, through growth in the volume of international transactions and through widespread liberalisation of financial markets that facilitated the trade in new types of financial products.

 conomic and Financial Interdependence at Outset E of the Financial Crisis The consequence of the construction over many decades by the US and the larger European economies of a closely connected transatlantic marketplace was that by the late 2000s, prior to the global financial crisis in 2008–2009, the transatlantic market was highly interdependent. This has implications for the discussion in later chapters where US-EU cooperation intensified, at intergovernmental level and   European Commission. 2002. “Meeting the Barcelona Priorities and Looking Ahead: Implementation”, Seventh Report, Brussels, 3 December. 69  Posner, Elliot & Véron, Nicolas (2010): The EU and Financial Regulation: Power Without Purpose?, Journal of European Public Policy, 17: 3: 400–415. 70  European Commission. 2005. “Review of the Framework for Relations Between the European Union and the United States: An Independent Study”, report prepared by academic team led by Professor John Peterson, Brussels, 18 April: 44. 71  Author interview with US Treasury representative, Brussels, 14 February 2014. 68

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between regulators at transgovernmental level. The high degree of interdependence led to highly coordinated efforts to drive transatlantic regulatory reform, which itself, significantly shaped international financial governance after the crisis. At the time the financial crisis descended on the US and Europe, there had been progressive consolidation of deep financial and economic ties between the US and the EU over many decades that led to the formation of an enormous transatlantic marketplace. The EU was overwhelmingly the US’ most important trade partner. In 2008, the EU represented US$639 billion in trade (imports and exports) with Canada second at US$600 billion; trade with the EU represented 18.85% of all US foreign trade.72 The EU exports significant goods to the US, with roughly 59% of US imports coming from the EU. Around 65% of US imports from Germany in 2007 consisted of related-party trade, or trade between company operations on each side of the Atlantic, highlighting how investment drives transatlantic trade.73 In respect to commercial transactions, US-EU trade generated US$3.75 trillion in total commercial sales a year and employed up to 14 million workers in mutually onshored jobs on both sides of the Atlantic.74 The US and EU financial services markets together in 2008 comprised nearly US$4.1 trillion (€2.8 trillion) in direct investment and had stock and bond flows worth more than US$51.3 trillion (€35 trillion) a year. They accounted for 70% of global financial services business and had a collective consumer base of 800 million people.75 In the area of foreign investment, despite a growing focus on emerging economies and the much-heralded growth of China as an important partner for the US, Europe remained much more significant. US firms invested US$26.4  billion in China between 2000 and mid-2008—but this was less than US investment in small Belgium and less than half of US investment in Ireland. US investment in the BRICs countries (Brazil, Russia, India and China) totalled US$57.6 billion from 2000 to mid-2008, on par with US investment in Germany alone and 14% of total US investment in the EU.76 This trend changed in later years. During the decade, six of the top ten US investment markets were in Europe. In fact, US investment in either the Netherlands or the UK in the decade was greater  US Department of Commerce International Trade Administration, “Top US Trade Partners”, (using figures compiled from the US Department of Commerce, Census Bureau, Foreign Trade Division), 2009. 73  Forster, Katrin; Vasardani, Melina; Ca’Zorzi, Michele. 2011. “Euro Area Cross-Border Financial Flows and the Global Financial Crisis”, Occasional Paper No. 126, European Central Bank, Frankfurt, July. 74  Hamilton, Daniel S. and Quinlan, Joseph P. 2009. “The Transatlantic Economy 2009: Annual Survey of Jobs, Trade and Investment between the United States and Europe”, Center for Transatlantic Relations, Washington DC. 75  EU-US Coalition on Financial Regulation. 2008. “Mutual Recognition, Exemptive Relief and “Targeted” Rules’ Standardisation: The Basis for Regulatory Modernisation”, Securities Industry and Financial Markets Association, March 2008. 76  Hamilton, Daniel S. and Quinlan, Joseph P. 2009. “The Transatlantic Economy 2009: Annual Survey of Jobs, Trade and Investment between the United States and Europe”, Center for Transatlantic Relations, Washington DC. 72

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than total US investment in all of South and Central America, the Middle East and Africa. America’s cumulative investment in Brazil in the decade to 2009 (US$12 billion) was roughly half US investment in Spain. US investment in Russia over the same period (US$9 billion) was 40% of US investment in Italy; and US investment in India (US$10.4 billion) was half US investment in Sweden and roughly the same as US investment in Poland, the Czech Republic and Hungary.77 Europe’s interest in the US was also huge. European investment in the US totalled a record US$1.5 trillion in 2007 (on an historic cost basis)—12% more than 2006 and more than triple the level of a decade earlier.78 The EU’s investment stock in the US rose by over 21% between 2002 and 2006, with the US accounting for roughly 35% of extra-EU FDI stock abroad. US services exports to the European Union more than doubled between 1997 and 2007, rising from around US$75 billion to nearly US$180 billion in 2007. There is also substantial evidence to suggest that market links intensified between the US and the EU in the years before the crisis. Between 2002 and 2007, US affiliate earnings from the EU rose more than threefold, from US$26.7 billion in 2002 to over US$82 billion in 2007.79 As had been the case historically in the postwar period, Europe’s dependence on the US was somewhat greater than the US’ dependence on Europe, however. One study that aimed to quantify the interdependence between banking in Europe and cross border stability found that the allocation of European banks to the US was “much larger than justified by the size of the United States” and that the EU had disproportionately lower exposure to China and Japan for example.80 The EU’s over-exposure to the US was partly because European banks favoured a large presence in the major markets of the US.  This helps explains why the largely US-originated financial crisis had such a significant impact on European banks.

Conclusion Despite the evolving US-EU relationship in the postwar era, more than half a century had passed before a regular dialogue on financial regulatory cooperation developed. Generally located in the context of the respective US-EU trade agendas, US-EU cooperation on financial regulatory matters became a heightened political priority for the US with the creation of the EU single market in the late 1980s. The following decade was characterized by successive intergovernmental agreements that included very little in terms of a committed financial regulatory agenda.

 Ibid.  Ibid. 79  Ibid. 80  Schoenmaker, Dirk and Wagnerz, Wolf. 2013. “Cross-Border Banking in Europe and Financial Stability”, International Finance, 16, No. 1. 77 78

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It was not until December 1998 when the EU started to roll out is extensive Financial Services Action Plan (FSAP), part of the broader single market program, that financial services regulatory cooperation rapidly moved up the political agenda. This saw not only cooperation at the intergovernmental level, but saw the expansion of other channels of cooperation, namely transgovernmental, with increasing involvement of transnational actors. US concerns over the EU’s vast unfolding legislative agenda were matched by EU concerns over legislative changes in the US. The mutual concerns over different standards, regulatory barriers and the cost of compliance that gradually intensified cooperation led to an institutionalization of cooperation in the early 2000s, with the Financial Markets Regulatory Dialogue (FMRD). Approaches to regulatory cooperation in other issue-areas to date, such as mutual recognition agreements and equivalence decisions, became the preferred approach for financial markets cooperation as well. However, significant obstacles remained, with issues such as the adoption of a common set of accounting standards failing to get very far. As shown in subsequent chapters, high levels of banking market, financial market and trade connectedness and the state of economic and political interdependence between the US and Europe had significant political implications when the financial crisis emerged in 2007. Interdependence laid the seeds for a high degree of cooperation between the US and the EU, leading to an unprecedented period of cooperative policymaking. The global financial crisis changed this and led to a significant intensification of cooperation in several issues-areas/financial sectors. The broadening and intensification of the relationship at intergovernmental, transgovernmental and international level and the involvement of transnational actors is discussed in later chapters.

Chapter 3

The US-EU Bilateral Intergovernmental Relationship

The US and its key European trading nations have had bilateral relationships for hundreds of years. Ever since the American Revolutionary War from 1775 to 1783, American and European representatives have met to negotiate political outcomes. The first transatlantic intergovernmental agreement was the Treaty of Paris signed in 1783 between US and British representatives, which recognized the earlier Declaration of Independence of 13 British colonies in North America and granted the US extensive western territory. One of a series of agreements that outlined the terms of peace between Britain, France, Spain, and the Netherlands, it established a pattern of intergovernmental negotiation between heads of state. At the time this was the only mode of international relations. This has changed considerably since then. The transatlantic relationship as discussed in this book deals with the relationship between the US and the EU and its postwar supranational institution predecessors, the European Coal and Steel Community (ECSC) and the European Economic Community (EEC). This relationship, which has developed in parallel with the evolution of EU legal competence and its legislative program on financial services, is now multifaceted, operating at different levels of government, crossing numerous jurisdictions, dealing with numerous issue-areas, encompassing both bilateral and international financial regulatory rules, and involving different legal systems with different types of stakeholders. It is also a relationship, as mentioned earlier, that has a huge impact on the global financial system given US and EU dominance in financial markets and the international rule-making environment. This chapter discusses how the intergovernmental bilateral relationship has evolved, with financial markets issues particularly becoming a political agenda in the 1990s. At this point, and amid broader charges in patterns of intergovernmental relations and progress in European integration, the financial markets agenda widened and became more pertinent. Financial markets questions then became a core matter of transatlantic cooperation with the global financial crisis in 2008–2009. This chapter further considers historical institutionalism, constructivism and © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_3

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realism as plausible explanations for an apparent task allocation between intergovernmental actors and transgovernmental actors. This chapter is structured as follows: after conceptualizing the topic, it overviews the key intergovernmental actors in the transatlantic context, its historical evolution, and then so as to highlight the different forms of intergovernmental cooperation, it examines US presidential trips to Europe in the postwar era. It identifies six different categories of visits and discusses changes in patterns over the period. It discusses the key formal US-EU agreements in the 1990s, highlighting their role in the establishing the basis for financial markets cooperation today, and proceeds to discuss the intensification in cooperation at intergovernmental level during the financial crisis. It finishes with a discussion of plausible explanations of the role of intergovernmental actors in financial markets policy.

Transatlantic Intergovernmental Actors Intergovernmentalism in its most basic sense describes relations involving heads of government and other high-level officials on behalf of the state.1 Intergovernmental cooperation, according to Keohane, takes place when the policies actually followed by one government are regarded by its partners as facilitating realization of their own objectives, as the result of a process of policy coordination.2 In international relations literature, the intergovernmentalist argument is that states (national governments or state leaders), based on national interests, are the central actors in international relations and determine the outcome of political negotiations.3 So who are the intergovernmental actors in the transatlantic relationship? Essentially, they involve actors at executive government level or the executive branch of government, which includes the president, vice president and the cabinet and arguably executive departments. However, heads of and top officials in independent agencies, boards, commissions, committees and departments fall under the transgovernmental category due to their subordinate rule-making capacity and their tendency to discuss and negotiate across national boundaries with foreign counterparts on technical matters. In respect to financial matters, in the US these include the US Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC) and its subordinate offices. The EU’s political structure makes is vastly different to that in the US, with its intergovernmental actors slightly different in nature. In the EU, the head political body is the European Council, the body that comprises the heads of state or 1  Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 5. 2  Keohane, Robert O. 1984. After Hegemony: Cooperation and Discord in the World Political Economy, Princeton University Press. 3  Verdun, Amy. 2020. “Intergovernmentalism: Old, Liberal, and New”, Oxford Research Online.

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government of the EU member states, as well as the President of the European Council and the President of the European Commission. The council is the key intergovernmental body within the EU and traditionally reaches decisions by consensus. Note that the European Council should be distinguished from the Council of the European Union, often referred to in the treaties and other official documents as the Council, and informally as the Council of Ministers. One of the three legislative bodies of the EU established under the Treaty of Lisbon in December 2009, along with the European Commission (which has the sole right of legislative initiation) and the European Parliament, it is comprised of government ministers from each EU member state who meet to discuss, amend and adopt laws. Given the differences in the US and the EU is worth noting the fact that EU heads of state, although not necessarily representative of the EU, do sometimes represent the EU in foreign discussions. EU heads of state also hold regular EU summits at which political positions are often established. Such positions tend to be reflected by the EU presidency internationally, an elected position held by member states on a rotating basis. Another regular meeting also takes place prior to EU summits, namely of the Eurogroup, the heads of EU member states in the Eurozone. A ministerial level body, the Eurogroup is the sort of body that could normally be regarded as intergovernmental in nature. Puetter, in an examination of the decision-making of the group, describes its informal and non-binding form of consensus-based decision-­ making as “deliberative intergovernmentalism”, however it doesn’t represent the EU abroad nor in international institutions and doesn’t take part on foreign negotiations. Rather it is intergovernmental within the EU.

Historical Context WW2 dramatically changed the way the US and EU engaged in negotiations over matters of international concern, questions around particular issue-areas and details of specific policies. The war created an entirely new international financial architecture with new international financial institutions, the International Monetary Fund (IMF)  and the World Bank, in which the US and the EU work closely together. Together they dominate these institutions and, particularly during the global financial crisis, coordinated their interests beforehand and at a bilateral level to maintain control over international regulatory reform. Intergovernmental negotiations were paramount throughout the negotiations around the establishment of the Organisation for European Economic Co-operation (OEEC) in 1948 to administer US and Canadian aid in the framework of the Marshall Plan for the reconstruction of Europe after the war and US support for the European Coal and Steel Community (ECSC) created in 1957. Diplomatic relations were established between the US and the EU’s supranational predecessors in 1953, when the US sent observers to the European Defence Community and the ECSC. The following year a small two-person information

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office was established in Washington to publicize the efforts of the ECSC.4 Funded by the ECSC high authority but headed by an American lawyer, George Ball, who had played a role in helping draft the Schuman Plan and served as advisor to the ECSC. Thus, the first supranational level diplomatic relations to the US were officially established and run by an American effectively seeking to support official US foreign policy. The US opened its own mission to the ECSC in Luxembourg in 1956 and set up a mission to the European Communities in Brussels in 1961 (since renamed Mission to the European Union). In 1972, the European Communities Information Service was granted full diplomatic status in Washington.

The Challenge to Intergovernmentalism The growth of other channels in cooperation other than at heads of state level continued to change as US and European trade and foreign levels grew exponentially as part of the postwar economic revival and amid a faster pace of globalization. The US increasingly looked to the EEC as the more important actor, particularly in trade. The shift towards greater supranational European diplomatic ties on the part of the US consolidated with the development of regulatory networks at the international level and the development of transgovernmental communications and discussion with the European Commission. Improvements in communications and transatlantic travel also aided communications between regulators on both side of the Atlantic. US-European financial markets interdependence accelerated in the 1970s, as multinationals around the world took advantage of gradual market liberalization. Throughout the 1960s, 70s, 80s and 90s, as transatlantic trade and foreign investment levels expanded, so did the level of interaction between multinationals. Amid rising levels of foreign investment and growth in trade volumes, capital controls were relaxed. Banks followed corporations around the world and established branches across the global, with US and European banks taking the lead.5 Those banks particularly invested in each other’s markets and from the late 1960s to the mid-1970s, European branches accounted for 60% to almost 80% of all US foreign bank branch assets. The period, as discussed earlier, was characterized by growth in the number of non-state actors in policymaking and as such the trend towards the involvement of regulatory networks in disputes and standards-setting was across the board. Central banks became increasingly active setting banking standards in the international context, such as with the formation of the Basel Committee on Banking Supervision

 Philippart, Éric and Winand, Pascaline (eds). 2001. Ever Closer Partnership: Policymaking in US-EU Relations, PIE Peter Lang, Brussels: 128. 5  Cranston, Ross. 2002. Principles of Banking Law, 2nd ed, Oxford University Press, Oxford. 4

Forms of Cooperation: Formal Agreements

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(BCBS), initially named the Committee on Banking Regulations and Supervisory Practices, in 1974. Amid international disturbances in international currency and banking markets, the committee sought to facilitate financial stability by improving the quality of banking supervision worldwide, and to serve as a forum for regular cooperation between member countries on banking supervisory matters. However, regulators and industry in other sectors became particularly active, for example in the area of securities with the formation of international standards bodies such as the International Organization of Securities Commissions (IOSCO) in 1983.

Forms of Cooperation: Formal Agreements Historically states have cooperated through a range of means and mechanisms. State visits, participation in conferences and summits and informal dialogues are forms of cooperation themselves, although such visits and meeting also often result in formal agreements, another form of cooperation. There are several forms of international agreement between countries, some binding and some not. Formal agreements between states can be referred to as treaties, international conventions, international agreements, covenants, charters, memorandums of understandings (MOUs), protocols, pacts and accords. Usually these different terms have no legal significance in international law6 but they vary in terms of their provisions and application to domestic law. In international law, a treaty is defined in the Vienna Convention on the Law of Treaties as “an international agreement concluded between states in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation”.7 Article 3 of the convention refers also to “international agreements not in written form” although oral agreements are often rare, they can have the same binding force as treaties, depending on the intention of the parties.8 Unlike verbal agreements in contract law, in international agreements a key issue is how can such an agreement be enforced. As such international cooperation tends to be in written form in one way or another. Even informal visits by heads of state are preceded and followed by negotiation and pre-agreement. In the international context, sherpas coordinate pre-negotiated

 United Nations Office of Legal Affairs.  Vienna Convention on the Law of Treaties between States and International Organizations or between International Organizations, 1986. 8  “Definition of key terms used in the UN Treaty Collection”, United Nations Office of Legal Affairs. 6 7

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policy proposals or agreements months before an actual G7, G8 or G20 meeting.9 The same function is performed by foreign offices. In this respect, state visits, informal discussions between heads of state and even summits, can be seen as somewhat ceremonial, as much of the real negotiation frequently takes place beforehand.

US Relations with Supranational Europe As discussed in the earlier chapter, US relations with supranational European institutions date back to 1953, when the US nominated observers to the European Defence Community and the ECSC. Up until the creation of the EU in 1993, US relations with Europe mostly took place in the context of multilateral fora such as the G7 and G8, or in its relations with the European Commission. There were no heads of state summits between the US and the EEC heads of states on a strictly bilateral level. This was the case until 1993 when the first US-EU Summit took place in Washington on May 7. US-EU summits—involving the US President, the Council President, and the President of the European Commission—were held biannually from 1993 to 2001 as a result of agreement under the Transatlantic Declaration signed in 1990. In 2001, US-EU summits moved to annually but then, in the midst of the financial crisis, there were two US-EU summits in 2009. Signed at intergovernmental level, key examples of international agreements in the US-EU context include the above-mentioned Transatlantic Declaration, a broad-­ based agreement based around principles which provided for no commitment under law. Agreements that are “declarations” are often non-binding and parties often choose the term deliberately to indicate that the parties do not intend to create binding obligations.10 The later New Transatlantic Agreement in 1995 and the Transatlantic Economic Partnership in 1998 were also “framework agreements”, that set numerous goals and laid out a basis for cooperation and the formation of sub-agreements. These agreements, discussed below, took the form of non-binding or “gentleman’s agreements”—as have more recent agreements such as the “Initiative to Enhance Transatlantic Economic Integration and Growth” and the “EU-US Work Programme”, both signed in 2005.11 The basis of the current transatlantic cooperative relationship, including in respect to financial markets, lies in this series of intergovernmental agreements.

9  Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 10  “Definition of key terms used in the UN Treaty Collection”, United Nations Office of Legal Affairs. 11  Günter Verheugen, Vice-President of the European Commission responsible for Enterprise and Industry, speech, “EU-US Cooperation a Partnership for Growth”, Washington, D.C., 21 June 2005.

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A New Euro-Atlantic Architecture The end of the 1980s decade signaled an era in renewed US-European engagement. George H. W. Bush came to the US presidency in 1988 amid a number of major challenges in respect to Europe. First the Soviet Union was disintegrating. In July 1989 at the G7 meeting in Paris, the US provided support to the European Commission to coordinate western aid to Hungary and Poland. From July to December 1989, Poland, Hungary, East Germany, Czechoslovakia, Bulgaria and Romania ousted Communist regimes. Then, on 9 November, the Berlin Wall fell, creating a powerful symbol of the collapse of the Soviet Union and an imminent end to the Cold War. The US was highly concerned about the political and economic effects a destabilized Europe and a what a rapidly changing post-Soviet landscape might create.12 Such concerns were even more acute given the stock market turmoil at the time, with the stock market crash on October 13, 1989, referred to by some as “Black Friday”, marking the beginning point for a widespread global recession in the early 1990s. On the trade front, concerns in the US about a “Fortress Europe” were growing.13 The US exported more to Europe than any other region and it was conscious of the EEC’s growing clout in world trade. During the 1980s, the US ran a larger, more persistent trade deficit than many had expected. Throughout 1990, the deficit remained above US$100 billion, or more than 2% of US GDP, starting to recede in 1991, possibly explained by the effects of the US recession.14 This heightened concerns that the European Second Banking Directive, adopted in 1989, aiming to harmonize banking supervision throughout the EC through the principles of home state control and the mutual recognition, would hinder US banks. There was the risk that US banks not already operating in the EEC would not be able to operate as the Directive necessarily discriminated against non-EEC banks.15 It was in this context that US Secretary of State James Baker went to Berlin in December 1989 to push for a “new era in Europe”. Outlining a vision for greater US engagement in Europe militarily, politically and economically, he called for the construction of a new “Euro-Atlantic architecture”—a “new Europe on the basis on

 Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in the Global Economy, Rowman & Littlefield, Maryland US: 290; Pollack, Mark A. 2003. The Political Economy of the Transatlantic Partnership, Robert Schuman Centre for Advanced Studies, European University Institute, Florence, Italy: 5. 13   Peterson, John. 1996. Europe and America: The Prospects for Partnership, Routledge, New York: 45. 14  Hickok, Susan and Hung, Juann. 1991. “Explaining the Persistence of the U.S. Trade Deficit in the Late 1980s”, St Louis Federal Reserve, winter. 15  Gruson, Michael and Nikowitz, Werner. 1988. “The Second Banking Directive of the European Economic Community and Its Importance for Non-EEC Banks”, Fordham International Law Journal, 12, Issue 2. 12

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a new Atlanticism”.16 Amid the renewed push, US President Bush and Commission president Jacques Delors in 1989 agreed to work to ensure regular meetings between high-level US and EC officials. The outcome of this new renewed push was the first of the intergovernmental agreements. The Transatlantic Declaration (TD) was adopted at the Commission on Security and Cooperation in Europe (CSCE) Summit in Paris on 23 November 1990. Signed by US President George Bush, Prime Minister Giulio Andreotti of Italy, which held the rotating EU presidency at the time, and European Commission President Jacques Delors, the declaration was intended to be multi-dimensional, based around security, economic cooperation and human rights.17 At its core, it sought to reinforce common values such as democracy, the rule of law, respect for human rights and individual liberty. It also established a framework for transatlantic dialogue going forward, with both sides pledging to hold regular high-level political summits and biannual US-EU summits between the US and European Council and Commission presidents. The agreement also established the basis for transatlantic regulatory cooperation “to address technical and non-tariff barriers to trade resulting from divergent regulatory processes”.18 The declaration was very much a reflection of US security but also economic interests at the time. In line with US preferences, the declaration asserted neoliberal values of promotion of market principles, a rejection of protectionism and expansion and strengthening and further opening of the multilateral trading system. It pledged to establish a “New Transatlantic Marketplace” under which barriers that hinder the flow of goods, services and capital would be progressively reduced or eliminated. The declaration also had mutual benefits. Europeans were keen to maintain security not even 50 years after WW2, but also economic ties. There was a keen interest in avoiding the widening of what some perceived as a “transatlantic drift”.19 There was a general uneasiness in key states such as the UK, France and Poland (as well as in the Soviet Union) about the reunification of Germany and the threat it could potentially pose in Europe.20 Even though the US was viewed by some Europeans as having “naked” security and economic intentions21 in initiating the declaration,  Baker, James A. (1989), “A New Europe, A New Atlanticism: Architecture for a New Era,” speech to the Berlin Press Club, Berlin, Germany, 12 December. 17  “The US-EU Partnership”, US Mission to the EU, Brussels, 5 December 1995. 18  “Transatlantic Relations”, US Mission to the EU, Brussels, 5 December 1995. 19  Gardner, Antony. 2001. “From the Transatlantic Declaration to the New Transatlantic Agenda: The Shaping of Institutional Mechanisms and Policy Objectives by National and Supranational Actors”, in Philippart, Éric and Winand, Pascaline (eds). 2001. Ever Closer Partnership: Policymaking in US-EU Relations, PIE Peter Lang, Brussels: 96. 20  Larres, Klauss. 2004. “West Germany and European Unity in US Foreign Policy” in Junker, Detlef (ed), The United States and Germany in the Era of the Cold War, 1945–1990: A Handbook: 2: 1968–1990, Cambridge, New York: 67; and Gilbert, Mark. 2010. “Partners and Rivals: Assessing the American Role”, in Kaiser, Wolfram and Varsori, Antonio, European Union History: Themes and Debates, Palgrave Macmillan, London and New York: 171. 21  Ibid.: 45. 16

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there were mutual benefits. Both sides saw the declaration as “essential for the preservation of peace and freedom and for the development of free and prosperous economies”.22 Despite hopes, the declaration failed to fulfill the expectations of many observers. It did lead to biannual US-EU heads of state level summits although some scholars described them as purely ceremonial.23 Nevertheless, the regular meetings facilitated discussion on numerous issues.24 The following year the European Commission and the US Securities and Exchange Commission (SEC) signed an agreement on securities cooperation, although this may have been under development independently. The statement of cooperation signed in 199125 established agreement for the two regulators to exchange information and provide mutual assistance on securities law enforcement and on the operation and oversight of the US and EU securities markets generally. This applied to matters on a bilateral basis as well as working in multilateral fora. The declaration also failed to achieve US ambitions of creating a trade deal with the EEC/EU through the promised transatlantic marketplace. It was eight  years before the European Commission came around to a trade deal and formally proposed the New Transatlantic Marketplace Agreement in April 1998. It however was later rejected by the European Council. The declaration also helped lead to the creation of several other agreements including an agreement between the US and the European Police Office  in 2001, the  Mutual Legal Assistance Treaty in  2003, the Container Security Agreement in 2004 and an agreement on Matters Related to Trade in Wine in 2005. Importantly the TAD represented a process of gradual institutionalization of the US-EU relationship.

US-EU Divergence Despite the Transatlantic Declaration, as the 1990s progressed, the US and the EU developed vastly different positions on a number of issues, including the Bosnian conflict from 1992 to 1995, NATO’s eastwards expansion as well as a range of important trade issues.26 The year 1992 saw yet another milestone in European integration, perhaps the most significant to date. On 7 February 1992, the 12 members  “Transatlantic Declaration on EC-US Relations”. 1990. European Commission.  Peterson, John. 2001. ‘Transatlantic Governance in the Historical and Theoretical Perspective’, in Pollack, Mark, and Schaffer, Gregory,  Transatlantic Governance in the Global Economy, Latham, MD: Rowman & Littlefield. 24  Philippart, Éric and Winand, Pascaline (eds). 2001. Ever Closer Partnership: Policymaking in US-EU Relations, PIE Peter Lang, Brussels. 25  European Commission. 1991. “Joint Statement on the Establishment of Improved Cooperation between the United States Securities and Exchange Commission and the European Commission of the European Communities”, 23 September. 26  Philippart, Winand, op. cit. p.97. 22 23

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of the European Communities signed the Maastricht Treaty (officially the Treaty on European Union), a move that gave birth to the European Union (EU). It is referred to as the Treaty of Maastricht given it was signed in Maastricht, in the Netherlands, a consequence of the Dutch holding the rotating presidency at the time. Resolving to continue the process of creating an “ever closer union among the peoples of Europe”, the treaty committed members to take “further steps... in order to advance European integration”.27 The treaty created the concept of European citizenship, created a common foreign and security policy, established criteria for countries to join the common currency28 (called the Maastricht criteria), established the European Central Bank (ECB) and the European System of Central Banks and described their objectives. It also established three stages for the introduction of European Economic and Monetary Union. It was the biggest step towards the federalist dream to date. When the treaty came into force on 1 November 1993, the European Communities were incorporated into a single European Union (EU). The US, under the new US Clinton administration, remained conscious that a united Europe, which the US continued to support for security and trade reasons, nevertheless posed a challenge to US interests on the economic front.29 Additionally, the levels of mutual trade were creating challenges and there was a realization that cooperation on trade barriers, notably regulatory barriers, would be needed to be consolidated not just through intergovernmental channels but through lower-level meetings.30 At the time, the EU and the US accounted for around 19% of each other’s total trade in goods, with high technology products accounting for 20% of the two-way trade flow. In 1995, EU-US trade in services accounted for over 38% of total bilateral trade and the EU was by far the biggest investor in the US accounting for 59% of total foreign direct investment (FDI) by 1996. At the same time, 44% of US FDI was in the EU.31

The New Transatlantic Agenda of 1995 In the leadup to the EU-US Summit in Madrid, December 3, 1995, three working groups were formed, one on cooperation on Central and Eastern Europe, another on the Common Foreign and Security Policy  (CFSP), and another on cooperation  Treaty of European Union.  The criteria being inflation, levels of public debt, interest rates, exchange rate. 29  Baun, Michael J. 2009. “The Maastricht Treaty as high politics: Germany, France, and European integration.” Political Science Quarterly, vol. 110, no. 4. 30  Philippart, Éric and Winand, Pascaline (eds). 2001. Ever Closer Partnership: Policymaking in US-EU Relations, PIE Peter Lang, Brussels: 48. 31  “The New Transatlantic Marketplace, Communication of Sir Leon Brittan”, Communication of Mr. Bangemann and Mr. Monti, Delegation of the European Commission to the United States, 11 March 1998. 27 28

The New Transatlantic Agenda of 1995

61

around international crime. At the summit itself, the New Transatlantic Agenda (NTA) and an associated Joint Action Plan were adopted to focus efforts of security and economic cooperation and creating “a common strategic vision of Europe’s future security”.32 While the first part of the NTA was heavily focused on security, it is clear that both sides saw economic concerns as part and parcel of the overall relationship. “Our economic relationship sustains our security and increases our prosperity,” the statement reads. Key US trade agencies, namely the Office of the Trade Representative, the US Department of Commerce and the National Economic Council, all had a role in drafting the NTA and saw it as an opportunity to contain transatlantic trade disputes and reduce trade barriers.33 The NTA was based on four broad objectives for US-EU collaboration: to promote peace and stability, democracy and development around the world; to respond to global challenges; to contribute to the expansion of world trade and closer economic relations; and to  build bridges across the Atlantic.34 Importantly the NTA created an institutional framework for cooperation, establishing a Senior Level Group of US and EU officials, comprised of the US Undersecretary of State for Economic Affairs, representatives from the Commission DGs for external affairs and trade and representatives from the Council presidency. The agreement went one step further than the Transatlantic Declaration and created deadlines for progress reports and placed pressure on low-level bureaucrats to produce results. It also established a lower level task force to monitor, coordinate and implement measures. It further committed both sides to a regular government-­ to-­government dialogue and created fora for industry input. These included the Transatlantic Business Dialogue (TABD), a regular forum that brings together annually hundreds of CEOs from US and EU firms and high-level government officials to exchange views on regulatory and standards matters.35 Also created were the Transatlantic Labor Dialogue (TALD), the Transatlantic Environmental Dialogue (TAED), the Transatlantic Consumer Dialogue (TACD), and the Transatlantic Legislator’s Dialogue, a parliamentary relationship that involved bi-annual meetings of the European Parliament and the US Congress on specific topics of mutual concern.36 Despite hopes for greater successes and significant interest from scholars, the NTA failed the create major outcomes. Although there was greater dialogue between US regulators and Commission officials, there were few solid outcomes. This cooperation had generated a “highly variable pattern of effectiveness in transgovernmental regulatory cooperation”.37 Pollack criticized the agreement as being largely

 “The New Transatlantic Agenda”. 1995. European Commission.  Gardner, op. cit.: 98–102. 34  US Mission to the EU, op. cit. 35  “History and Mission”, Transatlantic Business Dialogue. 36  “Transatlantic Legislators’ Dialogue”, European Parliament, Strasbourg. 37  Pollack, Mark A. 2005. “The New Transatlantic Agenda at Ten: Reflections on an Experiment in International Governance”, Journal of Common Market Studies, 43, Issue 5. 32 33

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ineffectual although a “noteworthy experiment in international governance”.38 As European commission vice-president Sir Leon Brittan noted, it had “not been able to engage the highest level of political attention on both sides of the Atlantic and is not sufficiently dynamic to deliver major political and economic results, although it has delivered useful ones”.39 It was essentially a broad agreement, with little detail and as such did not apply to financial markets specifically. The NTA nevertheless represented another step towards an institutionalization of the US-EU relationship. The NTA can also be viewed as part of an emphasis on the part of the US to form bilateral relations with key partners outside the multilateral trading system. In 1995, 76 members of the World Trade Organization signed a Financial Services Agreement as part of an effort to liberalize trade. After two years of negotiations, the US decided to go back on its previous offer and not to accept the Most Favoured Nation (MFN) principle in respect to financial services and was not a party to the agreement.40 Through the NTA biannual summits, it had also established a “habit and pattern of co-operation and joint action” between US and EU administrations.41 Even though financial services as a policy area were not specifically included in the NTA agenda, the start of cooperation on the area was not far away.

The Impending Introduction of the Euro In the late 1990s, another important development emerged that facilitated closer US-EU engagement on financial markets regulatory cooperation. The EU was preparing to roll out the bloc’s common currency, which threatened to dethrone the US dollar as the world’s major currency. At the EU Summit on 3 May 1998 in Brussels, the EU’s plans for monetary union took a major step forward when 11 member states were given the go-ahead to join the proposed common currency, the euro.42 The Council requested the European Commission “to table a framework for action… to improve the single market in financial services, in particular examining the effectiveness of implementation of current legislation and identifying weaknesses which may require amending legislation”. At the same time, European-wide rules would

 Pollack, 2005, op. cit.  “The New Transatlantic Marketplace”, Communication of Sir Leon Brittan, Mr. Bangemann and Mr. Monti, Delegation of the European Commission to the United States, Washington, 11 March 1998. 40  White, William R. 1996. “International Agreements in the Area of Banking and Finance: Accomplishments and Outstanding Issues”, BIS Working paper No. 38: 17. 41  “The New Transatlantic Marketplace, Communication of Sir Leon Brittan”, Communication of Mr. Bangemann and Mr. Monti, Delegation of the European Commission to the United States, 11 March 1998. 42  “Cardiff European Council, 15 and 16 June 1998 Presidency Conclusions”, press release, European Commission, Brussels, 17 June 1998. 38 39

The Transatlantic Economic Partnership in 1998

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provide clarity and harmonize regulatory arrangements throughout the EU. Many US firms felt there was a narrower scope for regulatory arbitrage and feared transatlantic divergence in approaches, prompting US firms to maintain their lobbying efforts for greater co-ordination.43 The impending introduction of the euro came at a time of a persisting US trade deficit and, perhaps more importantly, a widening trade deficit with Europe. The year 1998 was a year in which the US lost ground as an agricultural supplier to the EU market, with US imports from the EU overtaking US exports to the EU. The late 1990s also saw the US trade deficit with the EU increasing, from a surplus of US$8,964 million in 1992 to a deficit of US$52,954 million in 2000.44 For Europeans, given the roll out of economic and monetary union and the common currency, the EU was keen to make its mark on the international stage as an actor in the area of trade and investment.45 Amid persisting US-EU trade disputes, a growing US trade deficit, the impending introduction of the euro, and the EU’s preparation to roll out a comprehensive program of financial services reform, the US-EU Summit in London on 18 May 1998 launched a further closer largely trade-focused agreement between the two transatlantic partners.

The Transatlantic Economic Partnership in 1998 The Transatlantic Economic Partnership (TEP) was an agreement formed primarily to tackle trade. Although again it failed to touch on financial services specifically, it set the framework for later cooperation. The US strategy was to “intensify cooperation in the area of trade” with the EU, specifically the liberalisation of trade within the World Trade Organization (WTO).46 Negotiated in the lead up to the WTO 1999 Ministerial Conference in Doha to “cooperate” and coordinate positions on trade, the agreement established a series of dialogues. These would start from shared objectives on a wide range of subjects and “develop progressively more detailed coordinated positions on individual subjects for the WTO process”.47 The objective was also that the joint positioning would extend to other international fora and “continue thereafter”. The list of areas for proposed dialogue were extensive, notably: modalities and principles for negotiations, dispute settlement processes, transparency, services, agriculture, trade facilitation, industrial tariffs, intellectual property, investment, competition, procurement, trade and environment, accessions to the WTO, developing countries, e-commerce, labour standards, and rule of law issues.  Posner, Elliot & Véron, Nicolas. 2010. The EU and Financial Regulation: Power Without Purpose?, Journal of European Public Policy, 17: 3: 400–415. 44  Census.gov; figures not seasonally adjusted. 45   European Commission, DG Trade and Enterprise, “Transatlantic Economic Partnership: Overview and Assessment”, October 2000. 46  “The US-EU Partnership”, US Mission to the EU, Brussels. 47  “Transatlantic Economic Partnership”, European Commission archives. 43

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There was a distinct bilateral dimension that went beyond issues of international trade. Importantly it established a bilateral dialogue on issues of regulatory cooperation, the alignment of varying transatlantic standards and regulatory requirements and the extension of the existing US-EU Mutual Recognition Agreement to new sectors, on a sector-by-sector basis. A TEP Steering Group was established, along with expert working groups, to discuss particular issues. These included not only a common US-EU agenda for the Doha round of WTO trade talks, but identifying new areas for regulatory cooperation.48 A further measure was an “early warning system” to flag potential trade problems between the US and the EU before they became trade disputes. The issue-areas covered under the agreement, both multilateral in nature and as part of the ongoing bilateral dialogue plans, included food safety, plant and animal health, services, procurement, consumer product safety, intellectual property, biotechnology, competition law and e-commerce—not financial services. The TEP was an agreement notable in its lack of reference to financial services regulatory cooperation even though the European Commission’s plans for financial services reform were known at the time. However, it did create a recognition for the need to anticipate regulatory challenges in the future. It also created a system of regulatory cooperation broadly and confirmed that mutual recognition was a preferred approach for regulatory cooperation, an approach that would later be used for financial services. It further created a precedent for regular meetings, reviews of regulatory differences, jointly defined government principles/guidelines for effective regulatory cooperation, discussion on interagency regulatory procedures and, eventually, the convergence of standards.49 All of these set the scene for the first institutionalization of a financial markets regulatory dialogue.

 inancial Markets Moves Onto the Political Agenda F in the 1990s Despite the implementation of these agreements, the main efforts in regulatory cooperation related to key industrial sectors such as vehicles, pharmaceuticals, medical equipment, foodstuffs and chemicals.50 The three political agreements, the TD, NTA and TEP, nevertheless created a framework under which US regulatory authorities would work with mostly the European Commission and, to some degree, the ECB so far as financial stability matters were concerned. In respect to most financial services sectors, standards-setting remained international, having been  “Report of the Transatlantic Economic Partnership Steering Group EU-US Summit”. 2001. Transatlantic Economic Partnership Steering Group. Brussels, 14 June. 49  “Transatlantic Economic Partnership Agreement”, US Mission to the EU, 9 November 1998. 50  Communication from the Commission: Community External Trade Policy in the Field of Standards and Conformity Assessment, Commission of the European Communities, Brussels, 13 November 1996. 48

Specific Areas of Cooperation Under the Intergovernmental Agreement in 2005

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created in key international financial institutions such as the BCBS in respect to banking, IOSCO in respect to securities and IAIS in respect to insurance. Issues of financial stability were mostly coordinated in the FSF context (which later became the FSB). In the 2000s, the US and the EU continued to consolidate their pledge for regulatory cooperation with a number of agreements. These include the Guidelines for Regulatory Cooperation and Transparency in 2002, which built on commitments in the Joint Statement on Regulatory Cooperation of December 1997 and the Transatlantic Economic Partnership (TEP) Action Plan from 1998. The creation in 2002 of the Financial Markets Regulator Dialogue (FMRD), a forum comprised of US regulators and European Commission officials with responsibility over financial markets, meant most work took place in the transgovernmental context. Discussed in later chapters, in the FMRD the EU’s DG Internal Market and Taxation was charged with overseeing EU-US regulatory cooperation on financial markets along with US counterparts in the US Treasury. It was in mid-2000s that the US and the EU at intergovernmental level specifically pledged to intensify cooperation on financial markets issues. Under the “Initiative to Enhance Transatlantic Economic Integration and Growth” and the “EU-US Work Programme”, both signed in 2005,51 the US and the EU committed to work through the FMRD to facilitate cooperation in this area. The agreement specified numerous issues, which had not been done previously in earlier intergovernmental agreements. These were:

 pecific Areas of Cooperation Under the Intergovernmental S Agreement in 200552 • • • • • • • •

promoting convergence of accounting standards as soon as possible removing barriers to further integration of clearing and settlement systems encouraging competition among trade execution venues promoting deeper and wider capital markets making progress on deregistration reform and on insurance issues making progress on adoption and implementation of Basel II taking steps to help build the transatlantic venture capital market It also involved tackling corporate and financial fraud, money laundering, financing of terrorism, tax evasion, corruption and other malpractices.

The EU-US Summit on 30 April 2007 took this agreement further, with the US and the EU agreeing to form a political level body designed to oversee transatlantic negotiations going forward. The Transatlantic Economic Council formed as  an  Günter Verheugen, Vice-President of the European Commission responsible for Enterprise and Industry, speech, “EU-US Cooperation a Partnership for Growth”, Washington, D.C., 21 June 2005. 52  “EU-US Declaration Initiative to  Enhance Transatlantic Economic Integration and  Growth”, Council of the European Union, Brussels 20 June 2005. 51

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intergovernmental political body to specifically advance economic integration between the EU and the US. It aimed to do this by “accelerat[ing] government-to-­ government cooperation” and “push[ing] regulatory convergence in nearly 40 areas”.53 To this end, European Commission President José Manuel Barroso, German Chancellor Angela Merkel, who chaired the EU Council Presidency at the time, and US President George Bush signed a further agreement, the “Framework for Advancing Transatlantic Economic Integration between the United States of America and the European Union”, that outlined a detailed work program around areas such as financial markets reform, regulatory cooperation and investment among others.54 Meeting for the first time in Washington DC on 9 November 2007, the council comprised members of the European Commission and US Cabinet members with the political responsibility for the policy areas covered by the framework as well as a group of advisors on both sides. The priority areas in terms of financial regulatory cooperation were accounting standards, capital markets regulation and auditing and the EU-US FMRD.55

Changing Patterns in Intergovernmental Cooperation International cooperation has diversified, increased and intensified in the postwar period. While transgovernmental fora, transnational and international fora have become new channels of cooperation, intergovernmental cooperation remains the channel that establishes rapport and sets the overall political agenda. The key forms in the latter remain state visits, ministerial summits, ministerial visits and fora and political summits. In the transatlantic relationship, changing European geopolitical developments, changing US presidents, changing key heads of state in Europe and changing international environment have meant changes in the patterns of intergovernmental cooperation. At certain periods state visits have been preferred and at other time informal visits. Insight into changing patterns of transatlantic intergovernmental relations can be drawn from an analysis of US presidential visits to Europe since WW2. An analysis of all trips abroad for all US presidents from the presidency of Harry S Truman which lasted from 1945 to 1953 to the end of the Trump presidency reveals some clear patterns about the approaches to intergovernmental cooperation and the changes over time. Presidential trips abroad included a range of purposes, from US-EU summits, economic summits, visits to military bases, addressed to foreign parliaments, informal meetings with heads of states and monarchs,  “US-EU Summit in Washington on April 30, 2007”, US Mission to the EU, Brussels.  “Framework for Advancing Transatlantic Economic Integration between the United States of America and the European Union”, European Commission. 2008. April. 55  TEC meetings during 2008–2010 were held on 9 November 2007 in Washington; 13 May 2008 in Brussels; 12 December 2008 in Washington; 27 October 2009 in Washington; and on 17 December 2010 also in Washington. 53 54

Intergovernmental Patterns: Analysis

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attending state funerals, addresses in public, attending conferences, addresses to international organizations such as the OECD, stops on the way back from other locations, informal talks, attending the signing of international treaties, audiences with the Pope, attending NATO summits and meetings of the North Atlantic Council. To understand patterns in the way the choice of fora and approaches to international cooperation have changed in the postwar period, I categorized all postwar presidential trips overseas to Europe*. Six categories can be used to represent the major categories of visit types. These categories were: • Conferences and Summits (including the G7, G8 and G20 summits, US-EU summits, Economic Summit Meetings, and CSCE Summits, along with various conferences). • Informal Meetings with Heads of State or Monarchs, private meetings with heads of state, funerals and commemorations (visits that involved meeting several heads of state were counted as one visit) • Formal State Visits • Attending NATO Summits, meetings with NATO ministers or heads of states or addresses to NATO, attending North Atlantic Council summits • Addresses to national parliaments • Meetings and addresses to military An examination of all trips shows that overwhelmingly the most popular type of visit was informal meetings with heads of state or monarchs, with 173  in total. Interestingly, these picked up considerably in number under the presidency of Ronald Reagan which lasted from 1981 to 1989. His predecessor Jimmy Carter only went on three such visits, although it should be noted that he was only president for one term. The second most common type was Conferences and Summits (44  in total), followed by NATO/North Atlantic Council visits (29), and then formal state visits (25). This was followed by military related trips (19) and addresses to parliaments (11). Again, with these other categories, a clear trend can be discerned: there was a general increase in visits to Europe to attend Conferences and Summits and NATO/North Atlantic Council visits. There was also an upswing in visits to military personnel and addresses to parliaments. However, there was not a marked rise in the number of state visits over the entire period examined. These tended to be popular in the Carter and Reagan presidencies but seemed to be subsequently replaced by conferences and summits and informal visits as the preferred type of European trip (Table 3.1).

Intergovernmental Patterns: Analysis Four principal patterns in the figures are notable and highlight fundamental changes in the nature of intergovernmental relations between the US and Europe in the postwar period.

1 3 2 6 8 14 7 9 4 44

Informal Meetings with Heads of State or Monarchs# 2 6 7 3 14 6 3 12 21 32 35 27 8 173 1 25

2 1

3 0 9 7

1 1 1 1 2 3 4 3 5 5 3 29

1 1

Formal State NATO/North Visits Atlantic Council

11

5 2 5 1

1

1 1

19

1 11 3 3

1

Addresses to Met Military Parliament Personnel

Source: US Office of the Historian Notes * For the purpose of this analysis, “Europe” included all current EU member states (even though they may not have been in the EU or EEC at the time), as well as Norway, Switzerland and Iceland. It does not include Ukraine, Russia or Turkey, even though there were numerous trips to those countries as well ^These include G7, G8 and G20 summits, US-EU summits, Economic Summit Meetings, and CSCE Summits, along with various conferences # Visits that involved meeting several heads of state are counted as one visit (includes funerals and commemorations)

Harry S. Truman Dwight D. Eisenhower John F. Kennedy Lyndon B. Johnson Richard M. Nixon Gerald R. Ford Jimmy Carter Ronald Reagan George H.W. Bush William J. Clinton George W. Bush Barack Obama Donald Trump TOTALS

Term 1945–1953 1953–1961 1961–1963 1963–1969 1969–1974 1974–1977 1977–1981 1981–1989 1989–1993 1993–2001 2001–2009 2009–2017 2017–

Conferences and Summits^ 1 5

Table 3.1  All US Presidential Trips to Europe from 1945 to 2021

68 3  The US-EU Bilateral Intergovernmental Relationship

Intergovernmental Patterns: Analysis

69

Firstly, Richard Nixon’s presidency signaled increased engagement with Europe generally, with 14 visits to heads of states or monarchs and informal visits, as well as several state visits. This was an era when Nixon sought to reinvigorate and redefine relations with Europe. US-Europe relations were at an all-time low,56 with NATO set to expire in 1969. France had already left NATO’s command structure in 1966 and French president Charles de Gaulle also blocking Britain’s entry to the European Community twice.57 Europe was also embroiled in currency crisis, posing a major threat to the US-forged Bretton Woods system. The first trips were also an offshoot of the general easing of the geopolitical tensions between the US and the Soviet Union during the Cold War. The start of the year 1973 saw Denmark, Ireland and the United Kingdom joining the European Communities. Relations were at such a low and that Nixon placed such emphasis on rebuilding transatlantic relations that 1973 became known in the press as the “Year of Europe.”58 Secondly, there is a noticeable rise towards the use of summits and conferences on visits starting in the Ford presidency. It is notable that while Eisenhower attended five summits and conferences in Europe, his presidency was perhaps a little unusual in that there was a significant level of postwar institution-building in the context of the US Marshall Plan. In any case, it is clear that summits and conferences became a clear approach to international relations after the Ford presidency. It can also be remarked however that these did not replace the need for visits to heads of state or monarch or informal visits but rather supplemented them. This was a period where clearly US-European relations had intensified. Indeed, the first of the US-European economic summits took place in the Ford years—in Rambouillet in France from November 15 to 17, 1975. The first US-European intergovernmental summit of its kind, it came amid a period of severe international turmoil in the economic crisis in the mid-1970s. As discussed in the earlier chapter, the 1973 oil crisis started in October 1973 when the Organization of Arab Petroleum Exporting Countries announced an oil embargo in response to US support of Israel. This led to a US stock market crash in 1973–1974 and contributed to inflationary pressures and balance of payments problems in Europe.59 Rising inflation led to a breakdown of the Bretton Wood’s fixed parity system, thus adding to the lack of confidence caused by inflation itself. From the US point of view, “the sequence of inflation, disturbance of the fixed parity system, and a quintupling of the price of oil led to a damaging of world trade,

 Nichter, Luke A. 2015. Richard Nixon and Europe: The Reshaping of the Postwar Atlantic World, Cambridge University Press. 57  Hamilton, Keith. 2006. “Britain, France, and America’s Year of Europe, 1973”, Diplomacy & Statecraft, 17, Issue 4: 871–895. 58  Pierre, Andrew J. 1974. What Happened to the Year of Europe? The World Today 30, No. 3: 110–119; What ‘Year of Europe’? New York Times, October 31. 59  Papaspyrou, Theodoros. 2004. “EMU Strategies: Lessons from Greece in View of EU Enlargement”, paper presented at the Hellenic Observatory, The European Institute, London School of Economics, 20 January. 56

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and thus to unemployment in countries that depended on their exports”.60 President Ford said at the time that the summit was “designed to deal with economic questions but in a more fundamental sense it springs from the enormous interdependence of our societies and the common values which we share”. Thus, the US saw this first intergovernmental summit on international economic cooperation as a big picture exercise: securing cooperation in a time of crisis. Dubbed the first G6 meeting and attended by the Heads of State and Government of France, the Federal Republic of Germany, Italy, Japan, and the UK, the summit was later replaced by the G7 (adding Canada) and later the G8 from 1997 to 2014 including Russia. The leaders adopted a 15-point communiqué, the Declaration of Rambouillet, and agreed to meet in future once a year. G7 meetings have been held more or less every year ever since. The summit has significance in that it was arguably the start of international intergovernmental meetings designed to and steer the world economy through enhanced cooperation. Thirdly, Ronald Reagan’s presidency signaled a clear and sustained rise in overseas trips between US presidents to Europe to meet heads of state or monarchs. Reagan made 12 such trips, George H.W. Bush 21, Bill Clinton 32, George W. Bush 35 and Barack Obama 27. Donald Trump, also a one-term president, made eight informal visits to Europe. As with the increase in European trip engagement under Nixon, Reagan’s presidency adopted a more aggressive stance towards the Soviet Union, embraced a concerted pro-US trade policy which led to a clash of priorities with the EEC, and the consolidation of the European single market with the signing of the Single European Act of 1986. The fourth pattern noticeable in an analysis on all presidential visits in the postwar era is a significant intensification of US-EU relations in the 1990s, starting with George H.W. Bush’s presidency starting in January 1989 and continuing through to the Clinton presidency, and then the 2000s with the George W.  Bush and subsequently the Obama presidency. The 1990s was a period that saw successive US-EU intergovernmental agreements amid the collapse of the Cold War, a changing global trade environment,61 an acceleration in European political and economic integration, and an expansive financial services legislative agenda in the EU.  The US exported more to Europe than any other region. At the same time, the US was keen to build European support for its international trade agenda and its efforts to shape the multilateral trade environment.62 The US was also preparing to roll out the European Second Banking Directive as discussed above.

 National Security Adviser’s Memoranda of Conversation, Rambouillet Economic Summit November 15–17, 1975, Gerald R. Ford Presidential Library. 61  Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 35. 62  Ibid, 102–103. 60

Intensified Cooperation and the Global Financial Crisis

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Intensified Cooperation and the Global Financial Crisis The global financial crisis signaled a significant intensification in cooperation on a financial markets regulatory reform agenda generally. This was the case in respect to the intergovernmental relationship, as well as at transgovernmental level. There are several ways in which this was manifested. One was an increase in the number of summits. As discussed above, US-EU summits were held biannually from 1993 to 2001 and then annually. In the midst of the financial crisis, there were two US-EU summits in 2009. At all of the three US-EU summits held in 2008 and 2009, financial markets reforms were central to the agenda. Furthermore, G7-8 meetings or summits involving either heads of state or ministers typically took place every month and this pattern was maintained in the period around the financial crisis, with meetings in June 2007, July 2008 and July 2009. Most of the discussion in late 2008 and early 2009 took place in the context of the G20 and negotiations to establish a financial reform agenda as part of efforts to find a solution to the crisis. The crisis triggered the first G20 heads of state summit, with one on November 2008, two summits in 2009 (London in April and Pittsburgh in September), two in 2020 (Toronto in June and Seoul in November). G20 heads of state summits have subsequently been held annually ever since. These summits also supplemented the meetings of the newly established Transatlantic Economic Council and an intensification of transgovernmental coordination as discussed in a later chapter. An increase in cooperation was also manifested in the number of informal visits. UK prime minister Gordon Brown visited the US three times in 2008 (April 16–18, September 26, 2008 and November 14–15), with the latter for the G20 Summit in Washington in November. President Nicolas Sarkozy also visited twice (October 18 and November 14–15).63 US President Bush visited Europe twice in 2009 and President Obama visited Europe four times in 2009, the latter unusually high. These visits were supplemented by numerous visits by European Commission officials to the US and US regulatory officials to Europe. These included a trip to Washington in July 2009 by European Commission senior officials to meet with the SEC and the Treasury and a trip by Treasury officials to Brussels to meet with the European Commission’s DG MARKT and Internal Markets and Services Commissioner Charlie McCreevy in September 2009.64 The Director-General of Internal Market and Services, Jorgen Holmquist, also visited the US in April and September 2009, also to discuss financial regulatory matters. Discussion at sub-cabinet levels on important areas also took place on an increasingly frequent and intense discussion on a basis. As discussed later, during the financial crisis according to one US official, not a day went by without some contact

 “Visits by Foreign Leaders in 2008”, Office of the Historian, US Department of State.  “Joint Report on US-EU Financial Markets Regulatory Dialogue for the TEC Meeting”. 2009. DG Enterprise, European Commission. Brussels, 27 October.

63 64

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of some nature between the Commission and US officials on reform proposals.65 Financial markets questions consequently became a core matter of transatlantic cooperation during the global financial crisis. This intensification reinforced the role of heads of state in setting transatlantic financial markets regulatory cooperation. Such cooperation was virtually absent from intergovernmental agreements in the 1990s until the Transatlantic Economic Partnership in 1998. The financial crisis saw heads of state very much concerned about financial markets issues, more so than they had on a bilateral basis for decades. This was perhaps most clearly illustrated by the fact that the very first G20 Heads of State face to face meeting in Washington DC in November 2008 was referred to as the G20 Washington Summit on Financial Markets and the World Economy.

Financial Markets as an Intergovernmental Concern Financial markets regulation in the postwar period has not tended to be a routine subject for discussion at intergovernmental level. Like most issues, agenda items have come and gone depending on domestic preferences at the time. In the case of financial markets regulatory cooperation, a pattern emerged in the postwar era in which intergovernmental summits and informal visits tended to discuss the bigger issues, such as regional security, trade, and financial system stability where required. In the last several decades, a further trend has emerged in which heads of state tended to set the political agenda, while regulators have played a different role. They have taken charge of issue discussion, information sharing, problem identification, identification and creation of best practice, standards-setting, monitoring, reporting, problem solving and technical negotiations. In doing so, they have liaised with counterparts in other regulatory agencies in domestic settings, other regulatory agencies across the Atlantic, and in international financial standards-setting organizations. There are several plausible explanations for this general defacto task allocation. Firstly, initial efforts at international cooperation in financial markets regulation was led by central banks and regulators from the outset. Central banks were the key actors in international relations in the 1930, a role consolidated with the creation of the Bretton Woods institutions after WW2. As international banking expanded dramatically in the 1960s to the mid-1980s, as a consequence of enormous growth in world trade and foreign direct investment, central banks’ role expanded. Western economies opened up, capital restrictions were lifted, multinationals expanded abroad and US and European banks followed them. Many issues such as central bank cooperation on issues to do with international financial system stability and standards to do with currency exchange, securities trading and accounting standards were dealt with in the multilateral environment.

65

 Ibid.

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This created a pattern that remained and developed. Historical institutionalists would argue that regulators have developed their own agendas and have acted autonomously.66 Accordingly, the general split in task allocation between intergovernmental and transgovernmental actors is not necessarily the result of a deliberate executive decision, but the consequence of institutional evolutionary patterns. In this respect, timing, sequence and path dependency would have shaped the current role central banks, and other regulatory agencies in other sectors such as securities and insurance. This historical institutionalist view holds that financial markets cooperation has remained an issue largely in the hands of transgovernmental (and transnational) actors because existing institutions have entrenched patterns that are too difficult to rupture. Secondly, financial and banking markets tend to be highly complex, encompassing numerous sectors, from banking, to securities, to assets management and insurance. This is one of the reasons for the development of transgovernmental and transnational actors in policymaking generally. It is a domain that has necessitated the involvement of transgovernmental and transnational actors (regulators and industry) due to the specialist knowledge required to identify issues, propose solutions, develop technical standards and monitor cooperation. Specialist expertise can elevate certain decision-making beyond the grasp of many public authorities and politicians.67 This is a space in which, due to the technical nature of the work private actors have acquired policy-making functions and achieved legitimacy on the basis of their expertise and even their economic strength.68 Such specialists—which form policy networks and epistemic communities—could be government officials, either appointed by elected officials or directly elected themselves.69 Policy network analysis has found that such actors can perform many of the functions of a world government—legislation, administration, and adjudication— without the form.70 Such actors can define problems, identify compromises and supply “expert” arguments to justify political choices. They also can be technocratic, exclusive and jealous of their grip on the policy agenda by nature.71 Such analysis implies that governments are not entirely in control of rules and procedures and the shaping of international regimes. Verdun suggested people working in the same

 Peterson, John. 1995. Decision-making in the European Union: Towards a framework for analysis, Journal of European Public Policy, 2, No 1: 81. 67  Lindblom, Charles E. 1977. Politics and Markets, Basic Books, New York; Lindvall, J. 2009. The Real but Limited Influence of Expert Ideas, World Politics, 61(4): 703–30. 68  Tsingou, Eleni. 2003. “Transnational Policy Communities and Financial Governance: The Role of Private Actors in Derivatives Regulation”, CSGR Working Paper No. 111/03 January. 69  Slaughter, Anne-Marie. 1997. “The Real New World Order”, Foreign Affairs, 76, No. 5, September/October. 70  Ibid. 71  Petersen, John. 2001. The Choice for EU Theorists: Establishing a Common Framework for Analysis, European Journal of Political Research, 39: 312. 66

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profession and/or discipline could frequently be excluded “unless they work in accordance with their principled values”.72 A constructivist point of view, in which the repeated consolidation of the role of central bankers and other financial policy experts in international rulemaking, would hold that they continue to hold their place due to the role of ideas, identity and norms in shaping this pattern of task allocation.73 This view would hold that transgovernmental actors have taken the lead in identifying issues, discussing problems and even designing solutions because the norms that have guided them, as well as the state actors to whom they are ultimately responsible, continually reinforce their positions. It is interesting to note, as discussed in a later chapter, that bilateral transatlantic financial markets cooperation became particularly institutionalized in the 2000s as a result of deliberate choice on the part of US and EU leaders to build closer political and economic relations, including greater regulatory cooperation. This fact tends to challenge the constructivist view. Thirdly, one could argue that in fact states have firmly remained in charge of financial markets cooperation. Indeed, the major international financial institutions discussed are all membership organizations, with voting structures and representatives appointed by state agencies. While many of these are technically independent, the idea of absolute agency independence can be challenged. A realist view would suggest that states are ultimately in control of international financial institutions, and have institutionalized forms of cooperation on a US-EU bilateral basis. States can and do create new agencies, new regulators and new international bodies. Thus, the realist view would hold that transgovernmental and transnational actors play a major role in formulating financial markets policy in an international relations context because they want them to. Further that such institutions are a refletion of state preferences competing against other states in the international context.

Conclusion The evolution and growth of the US-EU relationship has seen an increasing number of issues on the agenda. This has changed the way heads of state interacted with other in the transatlantic context, particularly in recent decades, including in respect to financial markets regulatory cooperation. It has created a pattern in which heads of state have tended to set the political agenda for cooperation, especially given the now-institutionalized nature of formal dialogues on financial cooperation. This was particularly the case during the financial crisis when the US and the EU sought to coordinate preferences as part of plans to restore global financial stability and reform financial markets rules.  Verdun, Amy. 1998. “The Role of the Delors Committee in the Creation of EMU: An Epistemic Community?”, European University Institute, Working Paper RSC No 98/44, November. 73  Jung, Hoyoon. 2019. The Evolution of Social Constructivism in Political Science: Past to Present, SAGE Open January–March. 72

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At the same time, regulators have tended to play a distinct role in respect to discussion, problem identification, technical negotiation, and standards-setting among others. Several explanations offer a plausible explanations for this defacto task separation, including historical institutionalism, possibly constructivism and neoliberal and realist perspectives. In any case, the US-EU intergovernmental relationship remains highly relevant to financial markets cooperation between the US and the EU. While regulators have captured much of the limelight in recent decades as playing an integral role in negotiating and creating policy, the financial crisis showed that states cannot be dismissed as key actors in this policy area. The following chapter provides aims to provide insight into the mechanisms of the transatlantic intergovernmental relationship by presenting a case study on a period of particularly intense cooperation. The months prior to and weeks surrounding the G20 Washington Summit in November 2008 highlights the role of heads of state in setting the political agenda on issues of financial stability and financial regulatory reform.

Chapter 4

US-EU Cooperation in the G20 at the Outset of the Global Financial Crisis

The financial crisis crept up slowly on the US and Europe. In early 2006, the US housing market started to head downwards,1 although some financial industry executives suggested they were concerned about “serious signs of bubbles” as early as 2005.2 While 2008 saw sustained stock market falls and compounding financial markets losses, it was not until September 2008 with the collapse of US financial giant Lehman Brothers that the financial crisis took a turn for the worse and prompted US and European leadership to begin coordinating a transatlantic solution to a transatlantic problem. With US losses spreading to US firms in Europe and with European banks exposed financial to US losses, it was indeed a transatlantic problem. It only became a global problem when the massive losses affected global financial stability and highlighted the need for tighter regulatory reform. The last few months of 2008 were a particularly troubled time for financial markets. It was a period of particularly intense discussion at intergovernmental level between the US and the EU and its key member state leadership to coordinate an effective response to acute market problems. This period highlights the role that heads of state still play in issues concerning financial markets in respect to negotiating an agenda, agenda-setting for international fora an in respect to international financial governance generally. This chapter aims to provide insight into the role of heads of state—intergovernmental actors—in transatlantic cooperation of financial regulatory matters. Presenting empirical evidence taken from extensive research including interviews with key actors involved at the time, it takes the form of a case study on US-EU policy coordination at the height of the financial crisis in late 2008. It shows that,  The NAHB/Wells Fargo Housing Market Index, 12 July 2011.  Financial Crisis Inquiry Commission. 2011. “The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States”, Washington DC, January: 33. 1 2

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_4

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while latter chapters discuss the growing role of transgovernmental actors in financial markets regulatory cooperation, intergovernmental actors cannot be dismissed as being peripheral to this policy area. In fact, they arguably very much set and control the agenda. This chapter begins with a brief background to the financial crisis and its transatlantic dimension and proceeds to provide a largely empirical account of the efforts by the US and major European states and the EU to coordinate a response to the developing crisis. It outlines efforts to take a somewhat converged agenda to multilateral fora notably the G7 and then the G20, highlighting US and European interests. It then overviews the major agenda items, including expansive financial regulatory reform, fiscal stimulus plans and the beginnings of a renewed push for major financial regulatory reform in the international financial economy.

Background to the Financial Crisis The US economy enjoyed prosperous economic growth times in the mid to late 2000s, with sustained housing price growth in the US after 2002,3 rising household wealth and contained unemployment levels. As the housing market contracted, more borrowers were left vulnerable, pushing up delinquency rates. In early 2007 the housing markets continued to fall and, while delinquency rates typically rise when housing markets contract, there were particularly worrying signs this time. The foreclosure rate on subprime loans4 was particularly high, rising from 4.5% in the fourth quarter of 2006 to 8.7% a year later.5 As the property market went from bad to worse, the problems started to more significantly affect the financial markets, particularly banks that had heavy exposure to the mortgage market and some of the newer risky mortgage-based products. The latter included mortgages that were packaged into new types of residential mortgage-­ backed securities, including collateralised debt obligations, a new type of securitised product that comprised some higher quality and some poorer quality mortgages. Large banks, including investment banks Merrill Lynch, Bear Stearns, and the later bankrupt Lehman Brothers, and commercial banks and thrifts such as Citibank, Wells Fargo, and Washington Mutual, had packaged the loans into securities and sold them around the world. Concerns over the level of US subprime mortgages and the degree to which exposure to them had permeated the entire banking system started to cause shortages of liquidity in money markets around the world, causing inter-bank lending to dramatically slow in mid 2007. It also severely weakened capital standards at major

 Ibid: 444.  Subprime loans are loans that are extended to people who would not qualify for loans under tighter lending standards. 5  Op cit.: 22. 3 4

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banks and led to the upward repricing of risk across a broad range of financial instruments.6 The mounting mortgage markets losses had a big impact on banks— and this led to a second phase of the crisis during which financial institutions, notably US investment banks, incurred large losses.

The Transatlantic Dimension Many of these problems also afflicted Europe. With many of the largest banks having transatlantic operations, and with many of the riskier financial products having been sold throughout Europe, the effects started to reverberate cross the Atlantic. After troubled UK lender Northern Rock was forced to turn to the Bank of England for emergency financial support on 13 September 2007, triggering the first run on a UK bank since 1866,7 a series of other banking collapses followed. In August 2007 France’s BNP Paribas froze three of its investment funds, announcing it had no way of valuing the complex assets inside them. There was a widespread plummet in interbank lending. Banks not only conserved their own liquidity to absorb losses but there was widespread confusion, suspicion and nervousness in the banking market about lending. Banks were unsure which of them had exposure to the largest losses and some of them were even unsure about their own exposure. The drop in interbank market liquidity prompted the US Federal Reserve, the European Central Bank (ECB), central banks in individual EU member states and central banks around the world to continue to inject liquidity into the market to maintain lending and confidence. Central banks in the US, the EU, Canada and Switzerland in late 2007 intervened in the market. The crisis had moved from being mainly a housing market crisis to one that affected the entire banking system. Many European policymakers early on in the crisis were under the impression that Europe might not be as affected by the problems as the US. In early 2008, even though the US had been in recession for some months and markets had been on a downward spiral for over a year, the European Commission downplayed the risk of recession in January 2008. The European Commissioner for Economic and Monetary Policy Joaquín Almunia said the EU economy had been “less exposed than others to deep or protracted recessions”.8 The ECB was even sufficiently optimistic to raise interest rates during the summer. German finance minister Peer Steinbruck proclaimed that the financial crisis was an “American problem” and the product of American greed and inept and inadequate regulation.9  International Monetary Fund. 2008. “Global Financial Stability Report”, Washington DC, April.  House of Commons Treasury Committee. 2008. “The Run on the Rock: Government Response to the Committee’s Fifth Report of Session 2007–08”, London. 8  European Commissioner for Economic and Monetary Policy. 2012. European Commissioner for Economic and Monetary Policy. 2012. “Reinforcing EMU after the first decade”, press release. 9  Hamilton, Daniel S. and Quinlan, Joseph P. 2009. “The Transatlantic Economy 2009: Annual Survey of Jobs, Trade and Investment between the United States and Europe”, Center for 6 7

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The Turning Point As 2008 progressed, it became clear that the problems in the financial system were not just an ordinary downturn and that the potential for both financial crisis and serious economic percussion was real. In April 2008, the International Monetary Fund (IMF) proclaimed the financial market crisis had developed into “the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system”10 US investment bank Bear Stearns got into serious financial difficulty and was acquired by JP Morgan and then, in July 2008, the US Government was forced to bail out Fannie Mae and Freddie Mac. It was in September 2008 that events took a dramatic turn for the worse, leading to what would become new heights in transatlantic financial regulatory decision-­ making and coordination. With a history that dated back to 1850 and having survived the Great Depression, the collapse of Lehman Brothers, the fourth largest US investment bank in the US at the time, generated shockwaves. Crippled by debt and unable to find a buyer, it filed for bankruptcy on 15 September 2008 and had no cash when administrators took over.11 At the same time, Merrill Lynch, another of the big banks, had agreed to be acquired by Bank of America.12 This marked a new depth in the crisis and came amid concerns that American International Group, one of the country’s largest insurers, might also collapse. The Dow Jones Industrial Average, which was at a peak of 14,163 points on 9 October 2007, had fallen by 29.74% on 15 September 2008. The result was widespread financial panic. It became clear that the main priority was to stabilize the financial system by injecting liquidity in a market that had begun to hoard cash and hold up interbank payments. A proposed US systemic financial aid plan, originally floated by US Treasury Secretary Henry Paulson early in 2008, while controversial, moved closer to reality. The US Treasury’s objective was to remove the most toxic debt from bank balance sheets, notably the mortgage-linked securities that no-one wanted to buy.13 The goal of what was known as the Troubled Asset Relief Program was to help to remove uncertainty and re-focus the markets on fundamentals.14 Paulson worked closely with Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner in formulating the plan.15 Wall Street financiers

Transatlantic Relations, Washington DC. 10  International Monetary Fund. 2008. “World Economic Outlook”, Washington DC, April. 11  “Lehman Bros Files for Bankruptcy”, BBC News, 16 September 2008. 12  Sorkin, Andrew Ross. 2008. “Lehman Files for Bankruptcy; Merrill is Sold”, The New  York Times, 14 September. 13  “Text of Draft Proposal for Bailout Plan”, The New York Times, 20 September 2008. 14  Almunia, Joaquín, European Commissioner for Economic and Monetary Policy. 2008. “Situation of the World Financial System and its Effects on the European Economy”, speech in European Parliament Plenary Debate, Brussels, 24 September. 15  Paulson, Henry M. 2010. On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Hachette Book Group, New York.

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succeeded in convincing US officials, as Sorkin argues, that the top banks in the US were “too big to fail”.16

European Push for Global Help The Europeans were acutely aware that it was a problem that equally affected Europe. Joaquín Almunia, European Commissioner for Economic and Monetary Policy, told the European Parliament on 24 September that events had made it clear that internal European action alone was not sufficient to confront global challenges. “The interconnectedness of global financial markets, the high level of leverage and the use of innovative and complex financial techniques and instruments, which were only poorly understood, caused this risk to spread across the international financial system on an unprecedented scale,” he said.17 European leaders also became aware that several US member states’ sovereign positions were in severe financial stress. The collapse of Lehman Brothers deprived several European banks of funding. Latvia’s Parex bank, one of the country’s most important commercial banks in terms of local capital, was unable to refinance a syndicated loan.18 A quarter of the bank’s deposits were withdrawn in the space of three months. European banks had been hit hard from their exposure to Lehman Brothers’ collapse and EU leaders were also concerned at the state of European banks operating in the US. They were also concerned they would be locked out of the proposed financial assistance plan that was at the time the subject of much debate and controversy. There was uncertainty all round as to who would bear the responsibility for financial aid in both US and European markets. The development in late September 2008, and notably the collapse of Lehman Brothers, triggered a new phase of more intense joint US-European efforts to find a solution to a problem that had by now enveloped financial systems on both sides of the Atlantic. It also became clear to Europe that EU member states alone would not be able to mount the sort of coordinated financial aid response needed to stabilize the markets and restore confidence. In responding to European concerns, the US proposed a phone call with G7/8 finance ministers and central bank governors. It was scheduled for 22 September 2008. The G7/8 is heavily laden with European economies, including the UK, France, Germany and Italy, as well as the EU, represented by the European

 Sorkin, Andrew Ross. 2009. Too Big to Fail, Penguin, London.  Almunia, Joaquín, European Commissioner for Economic and Monetary Policy. 2008. “Situation of the World Financial System and its Effects on the European Economy”, speech in European Parliament Plenary Debate, Brussels, 24 September. 18  “Economic and Social Situation in the Baltic States; Latvia”, European Economic and Social Committee, Brussels, 2013. 16 17

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Commission,19 the ECB and the President of the Eurogroup.20 As such, it was a forum that addressed what was transatlantic in origin. Given there was no single EU authority or voice at the time, it was also a logical choice as a forum to discuss with key European leadership.

European Help for the US Bailout Plan The day before the call with the European counterparts, in a move that appeased European interests, Paulson announced that the original proposal, which would have excluded foreign banks, had been revised to include foreign financial institutions with a presence in the US. This came as a relief to European banks. In return the US secured European wide support for its own bailout plan, which at the time was facing major opposition in the US Congress. That week there had been much negotiation in Congress over the detail of the plan, proposed to amount to US$700 billion, which remained highly controversial. It was a plan the Senate Committee on Banking, Housing and Urban Affairs the next day described as “stunning and unprecedented in its scope and lack of detail”.21 The G7 call was primarily an opportunity to obtain mutual commitments to inject funds into the ailing financial system and to protect their mutual financial interests in doing so. It was also an opportunity to coordinate bailout plans across in the key transatlantic economy. For both sides, there was a risk that a bailout on one side of the Atlantic might adversely affect the markets on the other.22 Afterwards, European leaders came out strongly in support of the US bailout. In a pre-prepared statement following the call, the G7/8 leaders noted that they “strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan” to remove illiquid assets destabilizing financial institutions.23 The UK’s Gordon Brown, the next day, also came out strongly in support of the US package. Pledging to do whatever was necessary to “get these bad assets out of

 The Commission has been represented in all meetings since the 1981 Ottawa Summit.  The Eurogroup is comprised of the finance ministers of Eurozone member states. They meet at various times to discuss a range of issue relevant to the member states that use the euro. Since the financial crisis it has become particularly influential, meeting and coordinating a common position on various matters just prior to every EU Leaders Summit. 21  “Senate Committee on Banking, Housing and Urban Affairs Holds Hearing on US Credit Markets”, Hearing Transcript, Washington Post, 23 September 2008. 22  Paulson, Henry M. 2010. On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Hachette Book Group, New York. 23  G7 Finance Ministers. 2008. “Statement by G7 Finance Ministers and Central Bank Governors on Global Financial Market Turmoil”, 22 September. 19 20

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the system as quickly as possible”, he said the UK would do the same if needed.24 This would have been of some comfort to dissenters to the bailout in Congress who were reluctant to see Europe benefit from US taxpayer funds. The European Commission also expressed strong support for the US plan. “I renew our call for a swift decision by the US legislators on the so-called Paulson plan. The US must take responsibility. I trust that the US will show the statesmanship that is now required, for their sake and all our sake,” Commission President José Manuel Barroso said.25

The G7/8 and the Global Solution French President Nicolas Sarkozy, indirectly pointing the finger at the US, was particularly vocal as to what he saw as an American problem introduced to Europe, accusing it of market short-termism, executive remuneration excesses, and the failings of Anglo-American capitalism generally.26 On 23 September, addressing the 63rd session of the United Nations General Assembly the day after the G7 call, French President Nicolas Sarkozy said it was the “duty of heads of state and the governments of the countries most directly concerned” to “examine together the lessons of the most serious financial crisis the world has experienced since that of the 1930s”.27 In doing so, Sarkozy was implicitly placing pressure on the US to take responsibility. As the French held the EU Presidency at the time, he was effectively representing his fellow EU member states. His references to “those most directly concerned” could only have meant the US. It was only appropriate, he felt, especially, as far as he saw it, the US had caused the problems. He also made it very clear that the view in Europe was that a radical regulatory overhaul was needed. He called on the global community to “rebuild together a regulated capitalism, in which entire swathes of financial activity are not left to the sole judgement of market operators; in which banks do their job; which is to finance economic development rather than to fuel speculation; in which rules of prudence apply to all and serve to avert and soften shocks instead of exacerbating them; in which the credit agencies are controlled and punished when necessary; in which transparency of transactions replaces such opacity that today it is difficult to understand what is happening; and in which modes of remuneration do not drive people to take unreasonable risks”.28  Porter, Andrew. 2008. “Gordon Brown in Surprise Visit to Discuss Economic Crisis with US President George Bush”, The Telegraph, 25 September. 25  Barroso, José Manuel Durão, President of the European Commission. 2008. “Remarks of President Barroso on financial crisis”, press conference, Brussels, 1st October 26  Wyplosz, Charles. 2008. “French and German anger misses the fact”, Financial Times, 29 September 27  General Assembly Sixty-third session 5th plenary meeting, 23 September 2008, United Nations, New York. 28  Ibid. 24

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Three days later, British Prime Minister Gordon Brown also urged action. In a speech at the UN on 26 September he denounced “the age of irresponsibility” and urged the need for a global solution to the financial problems. “The current era has been one of global prosperity. It has also been an era of global turbulence, and while there has been irresponsibility, we must now say clearly that the age of irresponsibility must be ended. We must now build that new global financial order, founding it on transparency, not opacity; rewarding success, not excess; and responsibility, not impunity. That order must be global, not national,” he said.29 As Chairman of the group of European finance officials and Luxembourg Prime Minister Jean-Claude Juncker noted, ad hoc solutions to problems with financial institutions was not a “systematic enough method”.30

European Disjointed Coordination Meanwhile the US and the UK also sought to coordinate among themselves bilaterally. The US saw the UK as its primary ally in Europe, enjoying a “special relationship”,31 and in a position to influence other European states, some of which were more hostile to US interests. On 26 September, four days after the G7/8 conference call, President George W. Bush and Brown met face-to-face in Washington.32 The trip was said to have been impromptu and Brown’s intention was to visit the UN in New York to talk about economic development and poverty issues. He originally had no plans to meet US Treasury officials let alone the President.33 After the meeting, the UK also committed to a plan to remove the bad assets from the banking system.34 However, internal European coordination remained a problem. Even though the European Commission and the Eurogroup had urged the importance of European coordination, they were not in a strong position to do much about it. Financial support for ailing member state banks was very much a matter for member states and financial system distress more broadly a matter for European heads of state. In addition, EU member states had yet to coordinate their own internal positions on an appropriate political response. Instead, member states began to move independently  General Assembly Sixty-third session 11th plenary meeting, 26 September 2008, United Nations, New York. 30  Landler, Mark. 2008. “The U.S. Financial Crisis Is Spreading to Europe”, The New York Times, 30 September. 31  Dumbrell, John. 2009. The US–UK Special Relationship: Taking the 21st-Century Temperature, The British Journal of Politics and International Relations, 11, Issue 1: 64–78. 32  Paulson, Henry M. 2010. On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Hachette Book Group, New York: 335. 33  Porter, Andrew. 2008. “Gordon Brown in Surprise Visit to Discuss Economic Crisis with US President George Bush”, The Telegraph, 25 September. 34  US Whitehouse. 2008. “Press Briefing by Dana Perino”, 26 September. 29

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to shore up support for their own banks. On 30 September, France and Belgium bailed out Belgian-French lender Dexia with US$9 billion and Belgium, the Netherlands and Luxembourg joined in for a US$16.2 billion rescue of Fortis.35 The British Treasury seized the lender Bradford & Bingley, after no private buyer emerged.36

The Rise of the Eurogroup Another power shift was also evolving in the EU at the height of the financial crisis that affected the way the US liaised and coordinated policy with the EU. When the EU was planning to adopt the single currency in 1998 an informal grouping of Eurozone finance ministers was created to coordinate matters to do with the impending common currency. The Eurogroup, as it has come to be known, aimed to ensure the close coordination of economic policies throughout Eurozone countries and to assist in the informal decision-making of economic and monetary governance of the Eurozone as a whole. The group has gained greater influence as Eurozone economies have become increasingly integrated, politically and economically. It now meets once a month—the day before the meetings of the Economic and Financial Affairs Council (Ecofin) of the Council of the European Union. It is not a decision-making body per se and, rather than “deciding” matters, it tends to “discuss” them instead.37 Even so it has been described as the EU’s unofficial caucus and has been credited with making many of the significant economic and financial decisions the Council approve.38 Meetings also often involve the UK and Sweden too. A decision by the Eurogroup is almost always adopted by the Council given that Eurozone member states outnumber non-Eurozone states and given the centrality of the euro to the EU project. Puetter, in an examination of the decision-making of the ministerial group, describes its informal and non-binding form of consensus-based decision-making as “deliberative intergovernmentalism” but also “opaque and secretive”.39 The Eurogroup Working Group (EWG), an equally secretive group of policymakers that provide technical assistance and advise the Eurogroup and its President in preparing ministerial discussions, usually meets once a month ahead of Eurogroup meetings.40 Later during the G20 Summit in

 Landler, Mark. 2008. “The US Financial Crisis is Spreading to Europe”, The New York Times, 30 September. 36  Dougherty, Carter. 2008. “Authorities Aid Banks in Europe”, The New York Times, 30 September. 37  Author interview with former economic adviser to the president of the European Commission, European Commission, Brussels, 13 July 2014. 38  Puetter, Uwe. 2006. The Eurogroup: How a Secretive Circle of Finance Ministers Shape European Economic Governance, Manchester University Press. 39  Ibid. 40  Eurozone Portal, General Secretariat of the Council, “Eurogroup Working Group”. 35

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London on 2 April 2009 for example, the Eurogroup met to prepare for the IMF/WB spring on 24–25 April in Washington. As the financial crisis intensified and as EU member states started to call on the EU and the IMF for financial assistance in late 2008, it was inevitable that the Eurogroup’s work would intensify. It became critical in making decisions around financial assistance, including calling in the IMF.41 Just one day after the G20 Leaders’ Summit in London there was a two-day meeting of the Eurogroup in Prague. Having agreed at previous summits to coordinate their positions in responding to the financial crisis, the group agreed on a number of important measures of importance to the US. These included discussions ahead of the IMF spring meetings in Washington on 24–25 April and the G7 Finance Ministers’ meeting on 24 April. The matters included “the coordinated response to the economic crisis and IMF reform”.42 The Eurogroup’s ascendency in the EU decision-making structure came as the US was also changing leadership. The respective EU and US positions and effort to coordinate a position on IMF involvement were discussed just two days later with top US officials, also at a meeting in Prague, at a special meeting between new US President Barack Obama and the Heads of State and Government of the 27 EU member states. Later in the crisis, US Treasury Secretary Timothy Geithner for the first time attended the Eurogroup meeting, taken as a sign that the US was concerned about sovereign debt troubles in the EU affecting the US economy.43

US and European Bailout Moves On 3 October 2008, after political compromise in Congress over  Paulson’s proposed bailout44 and aided by vocal support from UK and European political leadership, Congress approved and enacted Paulson’s US$700 billion bailout plan, in the form of the Emergency Economic Stabilization Act of 2008. (Later the Dodd-Frank Wall Street Reform and Consumer Protection Act would roll back the total funding to US$475 billion. Overall approximately US$250 billion was committed to stabilize banking institutions, US$27 billion to restart credit markets and US$70 billion to stabilize American International Group (AIG) among other expenditure.45) The UK decided to take a slightly different approach to financial system support,   Author interview with DG ECOFIN representative, European Commission, Brussels, 11 February 2014. 42  European Commission. 2009. “Preparation of Eurogroup and Informal Economic and Finance Ministers Council, Prague, 3 and 4 April 2009 (Amelia Torres, Oliver Drewes)”, press release, 2 April 2009. 43  Armitstead, Louise. 2011. “European Finance Ministers Ignore US Treasury Secretary Tim Geithner’s Warning of ‘Catastrophic Risk’ Over Debt Crisis”, The Telegraph, 16 September. 44  US Whitehouse. 2008. “President Bush Meets with Bicameral and Bipartisan Members of Congress to Discuss Economy”. 45  “RAEP Programs”, US Treasury, Washington DC 41

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injecting capital into its banking system not by directly buying “toxic” assets off banks as the US had opted to do, but by buying UK bank preferred stock, which had the effect of bolstering bank balance sheets. The US also later ended up amending its bailout plan to buy fewer toxic assets directly from the banks and instead decided to buy the preference shares of banks as a way to provide them with funding.46 Meanwhile, in an effort to consolidate a single European response, on 4 October, France, Germany, Italy and the UK met in Paris to form a European consensus. They met not in the framework of the EU, but as the European G8 members. While they agreed to work “cooperatively and in a coordinated way within the European Union and with our international partners”,47 the European response remained fragmented. The next day Germany moved quite independently to support troubled lender Hypo Real Estate with a US$68 billion rescue package and announced plans to guarantee personal savings in a move that, by some estimates, would be worth US$1 trillion. This was a move that angered the UK, which felt it had been given no warning, despite the European G8 members agreement. It felt it was a move that could destabilize the banking system in Europe by forcing other European governments to do the same.48 It also concerned the US, which also felt it would have to follow suit.49 At the same time, the UK parliament on 8 October used anti-terrorism legislation to freeze the assets of ailing Icelandic bank Landsbanki, which had gone bankrupt the day before.50 The same day the UK also announced a bank rescue package worth £400 billion.51 Such inconsistencies around the response to the financial system’s liquidity crisis added to the voice for coordinated reform of financial markets regulation. Action by one country risked undermining the efforts of another. They also potentially favoured domestic banks to the expense of foreign banks. All countries were keen to secure their interests wherever they lay. Encouraged by success at having achieved greater security for European banks in US bailout program, European leaders pushed to establish a more coordinated longer-term reform agenda. It was becoming clear that not only could interests be jeopardized in the short-term but also the long-term. Having agreed at the European G8 meeting in Paris to push for a “global economic summit” to “rebuild the world’s financial system”, EU political leadership launched a push for a further response. As stock markets in Europe and the US continued to fall in response to the banking system problems, President Bush agreed to call a meeting of world leaders. Various  “Bretton Woods II – Five Key Points on the Road to a New Global Financial Deal”, The Guardian, 14 November 2008. 47  European G8 Countries. 2008. “International Financial Situation”, joint statement of the Summit, Paris, 4 October. 48  Hodson, Dermot and Quaglia, Lucia. 2009. “European Perspectives on the Global Financial Crisis”, Journal of Common Market Studies, 27, No. 5. 49  Paulson, op. cit.: 333. 50  Teather, David. 2008. “Iceland Government Seizes Control of Landsbanki”, The Guardian, 8 October. 51  “Rescue Plan for UK Banks Unveiled”, BBC News, 8 October 2008. 46

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options were considered, including a dedicated summit of world leaders. However, Paulson felt a broader leaders’ summit was not the way to do it and that it should be held after the upcoming Presidential election. He suggested Bush call fellow heads of state and urged them to send finance ministers to the upcoming G7 meeting of 10 October 2008.52

The European Push for a Summit and the G7 The day of the G7/8 finance ministers and central bank governors meeting, the Dow plummeted further. It continued to fall over subsequent days, falling another 29.18% over the next four weeks to 8451.19 points. The markets had reached a point after the failure of Lehman Brothers where there was a widespread collapse of confidence in the banking systems across the Atlantic.53 As US investment manager Warren Buffet proclaimed, the US economy and market confidence had “fallen off a cliff”.54 Convened by Bush and held at the White House in Washington, the meeting of G7 Finance Ministers was devoted to the crisis and financial stability issues.55 It included the US, France, Germany, the UK, Italy, Canada and Japan, as well as Prime Minister Jean-Claude Junker of Luxembourg, who was the President of the Eurogroup of countries, IMF Managing Director Dominique Strauss-Kahn, President Zoellick of the World Bank, and Financial Stability Forum (FSF) Chairman Mario Draghi. With the exception of the Canadian and Japanese prime ministers, it was an entirely US and European affair. It was clear at this time that any financial system support would involve the IMF. European leaders and the Commission were concerned at the ability of some member states to bailout their own banks and financial institutions. Some member states were in a much better position than others. Some in fact were heading for a sovereign crisis that threatened to destabilize the entire European Union. This is of course exactly what happened later. As of mid-2008, a total of 13 out of 17 Eurozone states had national debt-to-GDP limits that exceeded the limits considered acceptable under the Stability and Growth Pact that governs fiscal discipline in the EU. Introduced in 1998, the purpose of the Pact between the EU’s 28 member states is to ensure fiscal discipline in the EU by setting reference values for annual national budget deficits at 3% of GDP and public debt at 60% of GDP.  Above 60% was

 Paulson, op. cit.: 334; US Whitehouse. 2008. “President Bush Meets with G7 Finance Ministers to Discuss World Economy”, 11 October, Washington DC. 53  King, Mervyn, Governor of the Bank of England. 2009. CBI Dinner, Nottingham, at the East Midlands Conference Centre, 20 January; Landler, Mark. 2008. “The US Financial Crisis is Spreading to Europe”, The New York Times, 30 September. 54  “Warren Buffett’s Complete CNBC One Year Later Interview”, CNBC, 16 September 2009. 55  “President Bush Meets with G7 Finance Ministers to Discuss World Economy”, press release, US White House, October 11, 2008. 52

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considered “excessive” and yet current account deficits at the time were particularly large in most countries.56 This reflected high levels of external sovereign borrowing in some countries, notably Greece, and high levels of borrowing by private sector banks, notably in Spain, Portugal and Ireland.57 The question became how would assistance to such states’ financial systems be provided? The ability of the Commission to respond in a meaningful way was limited, with no central fund that could be used to bail out banks throughout the EU. It also could not be a solution going forward, with the Commission holding the view that such a fund would be illegal under the treaties that prohibit member states taking on the debt of other member states.58 It also argued that a one-size-fits-all plan “would make no sense” because the financial market situations and the nature of the banking systems in each member state were different.59 A logical solution as a means to do this was through the IMF. The US was already in favour of working through the IMF to not only provide loans where needed, but also to coordinate a regulatory response. Bush had earlier discussed a role-sharing arrangement with the FSF’s head Mario Draghi to recommend a response to the crisis. Accordingly, the meeting of G7 finance ministers and central bank governors on 10 October affirmed to “strongly support the IMF’s critical role” in assisting countries affected by the crisis.60 They also agreed to coordinate economic stimulus measures, coordinate efforts to unfreeze credit markets, maintain access to liquidity, and help restart the secondary markets for mortgages and other assets. They also agreed to work to broaden the financial contribution base to support the international financial system.61 It was after this meeting, according to Paulson, that President Bush “revived” the earlier idea of a broader heads of state summit,62 one that could potentially involve all the world’s large economies.

 European Commission, DG ECOFIN, “Stability and Growth Pact”.  Barkbu, Bergljot; Eichengreen, Barry; and Mody, Ashoka. 2012. “Financial Crises and the Multilateral Response: What the Historical Record Shows”, Journal of International Economics, 88: 425. 58  Article 125 that states member state “shall not be liable for or assume the commitments of central governments” . 59  European Commission. 2008. “FAQs on Europe’s Response to the Financial Crisis”, press release, 14 October. 60  G7 Finance Ministers. 2008. “G7 Finance Ministers and Central Bank Governors Plan of Action”, 10 October. 61  Ibid; US Whitehouse. 2008. “President Bush Meets with G7 Finance Ministers to Discuss World Economy”, 11 October, Washington DC; Lowery, Clay. 2008. Temporary Alternate Governor of the Fund and the Bank for the United States, “Statement by the Hon. Clay Lowery, Temporary Alternate Governor of the Fund and the Bank for the United States”, speech at the Joint Annual Discussion on Behalf of the Hon. Henry M. Paulson, Jr., Governor of the United States of America to the International Monetary Fund and the World Bank Group, Washington DC, 13 October. 62  Paulson, op. cit.: 373. 56 57

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The G7 as a Steering Committee for the G20 It is clear that the G7 meeting was effectively a mechanism by which US plans could be integrated into a broader international effort involving G20 countries, which could assist with funding financial stability efforts and would endorse the IMF’s role in crisis resolution. The G7 meeting on 11 October was held in the morning of the 11th October—just hours before a broader G20 meeting in the afternoon chaired by G20 Finance Ministers and Central Bank Governors. The meeting, chaired by Brazilian Finance Minister Guido Mantega at the IMF Headquarters in Washington, agreed to coordinate financial stimulus, work through the IMF to support the international financial system and coordinate with each other.63 The earlier G7 meeting could have been held at G20 level but instead the decision process was channelled through the smaller US and European-led G7 first. In effect, the G7 acted as the steering committee for the G20. With the IMF and World Bank planning to hold their respective annual meetings the following weekend, at which representatives of China, Russia and India would attend, a G7 meeting was convenient timing.

Eurogroup as Steering Committee for the EU At this point, Europeans finally agreed on a common plan of action. Just as the G7 meeting had been a steering committee for the G20, a meeting of EU Eurozone states was effectively the steering committee for the broader EU. On 12 October 2008 an emergency meeting of Eurozone countries was held in Paris under the French EU Presidency. It was the first such meeting since the launch of the euro and UK Prime Minister Gordon Brown was invited to attend. It was most unusual for a non-Eurozone member to attend. The meeting, just prior to a full EU Summit on 15 and 16 October, developed a coordinated action plan entitled “Declaration on a Concerted European Action Plan of the Euro Area Countries”.64 It outlined plans for coordinated bank bailouts throughout the Eurozone, some of which had by this stage already been initiated, and also endorsed the UK’s proposal to restore liquidity to the market by acquiring bank preferred shares or other similar instruments. In addition to this measure, Eurozone ministers agreed to guarantee the medium-­ term debt (bonds with up to five years maturity) issued in the EU. It gave countries the option to target particular types of debt, depending on their own domestic situations. The ministers also agreed to recapitalise banks by acquiring their preferred shares or other instruments and restructure those banks (in other words nationalize or semi-nationalize) at their discretion.65 They further agreed to allow flexibility  “G20 Communiqué”, Washington DC, October 11, 2008.  Council of Ministers (2008) “Declaration on a Concerted European Action Plan of the Euro Area Countries”, 12 October. 65  Ibid. 63 64

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over interpreting accounting rules and to share information between them and with the European Council, the Commission, the ECB and the President of the Eurogroup on crisis management. Member states would assist their own banks but act in a “concerted and coordinated manner”.66 In this respect the Eurogroup became an effective steering group or the broader EU.  Its ascendency in the EU decision-­ making structure became a pattern subsequent to the financial crisis. The UK had already announced its financial assistance, but the following day on 13 October France announced a €360 billion plan67 and Germany a €500 billion plan on 17 October.68 Now armed with a EU mandate, Europeans decided to visit Bush, apparently in an effort to try and steer the direction of the solution. The next week, following the 12th Francophone Summit in Quebec on 17 October, Sarkozy, representing the EU Presidency and accompanied by European Commission President Barroso, made an impromptu visit to Bush.69 Sarkozy had been sparring with Brown over who in Europe would lead the reform efforts. European unity was still an ideal. Meanwhile, further bailouts were announced in Europe.

The US Agrees to a G20 Summit On 18 October 2008 the European leaders met with Bush at Camp David. At this stage it was still not clear that a G20 meeting would take place. It is not clear exactly where the original idea for the G20 came from. Some commentators insist that the decision to hold a G20 summit was a European idea.70 It is clear that Europeans wanted the US to take the lead. Paulson argues that Europeans did not want a full G20 meeting but Bush “insisted” on a G20 that included China and India.71 According to Paulson’s account of the meeting afterwards, Sarkozy “had won agreement on a meeting, which we had already decided to hold, but little beyond that”.72 Barroso issued a statement afterwards explaining that “Europe wants the calling of an international summit as soon as possible to launch an effective world

 Council of Ministers (2008) “Declaration on a Concerted European Action Plan of the Euro Area Countries”, 12 October. 67  “Banking Bail-out: France Unveils €360bn Package”, The Telegraph, 13 October 2008. 68  “Germany Responds to Finance Crisis: Parliament Approves Bank Bailout Package”, Spiegel Online, 17 October 2008. 69  Paulson, op. cit.: 374. 70  Mackintosh, Stuart P.M. 2017. The Redesign of the Global Financial Architecture: The Return of State Authority, Taylor & Francis: 29. 71  Paulson, op. cit.: 375. 72  Ibid.: 374. 66

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response to world crisis”.73 In any case, it was a US decision at the end of the day.74 It held the G20 presidency at the time. During the meeting, the three leaders agreed to take steps to set up a series of international meetings to review efforts to address the crisis and seek agreement about how to prevent a reoccurrence. President Bush later issued a statement saying world leaders “will be consulted about the idea of a first summit”.75 Involving G20 nations in the decision-making on the financial crisis response was seen as a more inclusive move, but it didn’t really shift power away from the US or from Europe. As argued later, it was in fact a move designed to broaden responsibility for the financial system’s integrity. It also served to involve other economies in which the US and the EU had significant economic interests in the regulatory reform agenda, and at the same time involve those economies in the financial contributions to the IMF funding pool. A healthy pool of resources was going to be needed. It was after this that US and European rhetoric stepped up as to the need for a “global solution”. At this point the US and the EU had effectively agreed to involve a wide international group of countries in a financial stability and regulatory reform solution to the crisis.

The G20’s Genesis The G20 forum of finance ministers and central bank governors, created in response to the financial crises of the late 1990s and to a growing recognition that key emerging-­market countries were not adequately included in the core of global economic discussion and governance, superseded the G7 as the primary international agenda-setting grouping of countries.76 Formally born on 25 September 1999 at a meeting of the G7 finance ministers meeting, it was created “to broaden the dialogue on key economic and financial policy issues among systemically significant economies”.77 Criticism around the formation of the G20 included that because it had no secretariat or independent staff it was entirely political and hence would lead

 European Commission. 2008. “Transcript of President Barroso’s statement at the joint press conference with President of the United States George W. Bush and President of the French Republic Nicolas Sarkozy following their meeting in Camp David shortly after beginning of the financial crisis”, 18 October, viewed 14 August 2014. 74  US Whitehouse. 2008. “President Bush Meets with President Sarkozy of France and President Barroso of the European Commission”, 18 October; US Whitehouse. 2008. “President Bush Hosts Summit on Financial Markets and the World Economy”, 15 November; Paulson, op. cit.: 374. 75  US Whitehouse. 2008. “President Bush Meets with President Sarkozy of France and President Barroso of the European Commission”, 18 October. 76  “What is the G20”, G20. 77  G7 Finance Ministers. 1999. “Statement of G7 Finance Ministers and Central Bank Governors”, September 25, Washington DC. 73

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to a US-dominated “G7-ization” of the world.78 Other criticism suggested that the G20’s creation highlighted the fact that the G7 specifically did not want to put reform of the international financial system in the hands of the IMF or the World Bank where developing countries had an institutionalized role.79 It is true that ever since its formation, unlike international institutions such as the Organisation for Economic Co-operation and Development (OECD), the IMF or the World Bank, the G-20 has had no permanent staff. The G20’s formation came amid concerns that under-developed economies were under-represented in financial and economic global governance decision-making. China particularly was the big emerging global player invited into the G20 that had not been represented in G7 meetings. Criticisms persisted around the G20’s formation that the south was under-represented and it was also felt by some that institutions such as the IMF and World Bank provided an environment with greater protection of the south’s interests than the soft law environment of an informal finance minister’s meeting.80 However, the broadening of the G7 was in line with efforts to broaden the decision-­making of institutions like the IMF and World Bank and reflected greater policy interdependence between industrial countries and major emerging market economies.81 The G20 has since become a kind of steering committee for the work of organizations in the current system, including the existing standards bodies and the existing multilateral institutions like the IMF and multilateral development banks. The IMF and the World Bank were initially invited to join the G20 “to ensure effective liaison” with these international organizations. This is certainly the way it evolved after the financial crisis, with the IMF intimately involved in shaping the post-crisis financial governance architecture. Even though the expansion from the G7 to the G20 broadened the world’s “steering committee”, the US and the group’s European economies are its largest economies. Together the US and the four European member economies (the UK, France, Germany and Italy) represent 75% of the grouping’s GDP.82 The EU is also represented in the EU and together the US and the EU are the world’s leading economies and roughly on par in terms of size. The US in 2013 generated 19.2% of the world’s GDP and the EU generated 18.2% (US$16.7 trillion and US$15.8 trillion respectively out of a total world GDP of US$87.2 trillion).83 As with the G20, the then-FSF  Bradford, Colin I. and Linn, Johannes F. 2004. “Global Economic Governance at a Crossroads: Replacing the G-7 with the G-20”, Policy Brief #132, The Brookings Institution, Washington DC, April. 79  Kirton, John. 2004. “Toward Multilateral Reform: The G20’s Contribution”, G8 Research Group, University of Toronto, Toronto, June 25. 80  Ibid. 81  Bradford, Linn, op. cit. 82  G20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union. 83  CIA Factbook, data extracted January 2015. 78

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that was formed to develop technical standards, monitor implementation and facilitate central bank and regulatory cooperation, has similarly been dominated by the US and Europe. When it was created, in addition to the G7 (whose only non-US/European members are Canada and Japan) it included Australia, Hong Kong, Singapore, Switzerland, and the Netherlands, as well as the Basel Committee on Banking Supervision, the IAIS, IOSCO, the IASB, the IMF, the World Bank and the ECB. This gave rise to legitimacy concerns from the start with a stark divide between the developed country “rule-makers” and the lesser developed “rule-takers’”—the latter of which were reluctant to embrace rules they had little input into.84

Summit Preparations and the US-EU Agenda The summit was announced in late October. It came amid further market turmoil, with the UK government, in an effort to avert the collapse of the UK banking sector, bailing out several banks on October 23, including the Royal Bank of Scotland, Lloyds TSB, and HBOS. These followed British bank Northern Rock that had been nationalized earlier in the year. Ireland’s Anglo-Irish Bank had also been nationalized. The task of official invitation was given to the G7 ministers. They were asked to invite “counterparts from a number of systemically important countries from regions around the world” for the first G20 Heads of Government meeting in Washington on 14–15 November 2008.85 Even as preparations for the first G20 Leaders’ Summit were made, it has been claimed the Europeans continued to “resist” the idea of a full G20 meeting, believing the solution was a US responsibility, and it is for this reason that, as a concession, the US suggested Spain and the Netherlands could attend as invitees of the EU Presidency.86 UN Secretary-General Ban Ki-Moon offered the UN’s New York headquarters as the summit site but the US chose to have the summit closer to home in Washington.87 At the very earliest stage US and European leaders dominated the list of issues to be discussed at the G20 Leaders’ Summit. A draft agenda, originating from Washington, was negotiated between senior officials from government departments of G20 member states. The US wanted a number of measures, including a round of fiscal stimulus to stimulate the market, working through existing international financial institutions (the IMF, the World Bank, the regional development banks), coordinated monetary policy and an expansion of the role of the FSF. It had presented a range of recommendations to the G7 finance ministers and central bank governors  Helleiner, Eric. 2010. “The Financial Stability Board and International Standards”, The Centre for International Governance Innovation, Ontario, Canada, CIGI G20 Papers, No. 1, June. 85  G7 Finance Ministers, 2008, op. cit. 86  Paulson, op. cit.: 374. 87  G20 Information Centre, “Commitments Contained in the Documents Issued at the Summit on Financial Markets and the World Economy”. 84

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in April 2008 as part of an effort to enhance the resilience of markets and financial institutions amid the crisis. The US placed priority on continuing the FSF’s work and indeed many of the reform proposals at the summit would follow the work of the FSF. These included a review of regulation of the derivatives markets, credit default swaps, risk disclosure by market participants, supervisory oversight of risk management and credit ratings agencies, as well as the use of supervisory colleges to regulate the biggest banks and agreement on accounting standards developed by the IASB, the latter of which was a thorny subject. The US had until now famously dragged its feet on implementing the latter standards.88 The Europeans, particularly the French, also wanted other issues on the agenda, including executive banking bonuses and tackling the issue of tax havens.89 Canadian Finance Minister Paul Martin, who would chair the forum for the first two years, publicly called for the G20 to promote better supervisory and self-regulation arrangements. The title and the theme of the summit itself summarised the issues list well. The summit was dedicated solely to tackling the financial markets crisis and, entitled the “G20 Leaders’ Summit on Financial Markets and the World Economy”, it was the first of its kind dedicated to an international financial or economic crisis. Both the US and the EU were publicly keen to take credit for taking the initiative. The EU referred to the G20 leaders’ process as “a joint EU-US initiative” that was established by both sides “to tackle the global financial crisis effectively”.90 The US meanwhile argued that “a big proportion of what’s happened has been down to the US and we recognize our responsibility and the need for us to take the lead” in solving the crisis.91 In his invitation to leaders, US President Bush said leaders would review progress being made to address the current financial crisis, advance a common understanding of its causes and, in order to avoid a repetition, agree on a common set of principles for reform of the world’s financial markets. Working groups at later summits would further develop these principles.92

The First G20 Leaders’ Summit The first meeting of the G20 leaders on financial markets and the world economy was held at the National Building Museum in Washington, D.C. on November 14–15—just ten days after Barack Obama had inherited the world’s biggest problem in being elected the 44th president of the United States. At the summit, the EU

 Parker, George. 2008. “EU Leaders Press US to Speed up Reforms”, FT.com, 10 November.  US Whitehouse. 2008. “President Bush Hosts Summit on Financial Markets and the World Economy”, 15 November; Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 90  European Council, “What does the European Council do?”. 91  Wheatley, Jonathan. 2008. “G20 Calls for Expanded Role to Combat Economic Crisis”, FT.com, 10 November. 92  US Whitehouse. 2008. “Statement by Press Secretary Dana Perino”, 22 October. 88 89

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played a central role. Unlike the G7/8, the EU is full member of the G2093 and was party to all the negotiations and attended the summits. It was jointly represented by both Commission President José Manuel Barroso and Council President Herman Van Rompuy.94 Indeed representatives from the EU Presidency, the European Commission and the ECB were also invited to attend the summit, as they have since, as effectively heads of state. A delegation led by the European Commission’s Sherpa Antonio Cabral, who was also economic advisor to Barroso, represented the Commission in extensive pre-summit negotiations. Prior to the summit these negotiations took place between countries due to attend, with the details of many of the proposals deemed likely to proceed coordinated by the G20 sherpas and research staff from respective governments.95 G20 sherpas met every month for approximately two days leading up to the summit to negotiate positions.96 This liaison usually takes place between representatives of finance ministries and central banks, as most G20 summits (as with previous G7/8 summits) were meetings of finance ministers and central bank governors. In the G20 there are no formal votes or resolutions on the basis of voting shares or economic criteria and as such all matters are determined by consensus. Countries tend to choose their issues carefully, investing their political capital wisely, given there are a wide range of potential issues to discuss and with very little true consensus on any issue.97 The resulting agenda was very much a US-EU wish list of reforms although, according to a representative of the European Commission involved in the G20 meetings, the US “dominated” the G20 Washington agenda in “most respects”.98

The Washington Summit Outcome The outcome of the first summit dedicated to financial reform and crisis management was the formation of a fairly firm US-EU-centric wish list of regulatory reform to roll out across the Atlantic and beyond to the world’s other major industrialized economies. A total of 95 commitments were negotiated with G20 member states beforehand and agreed to prior to the summit taking place.99 In contrast, the G20 Finance Ministers and Central Bank Governors meeting in Sao Paulo the week before in early November agreed on only a broad approach to responding to the crisis.100 Although the summit was criticised as being insufficiently detailed (it fell  European Commission, “The EU at the G8/G20”.  Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 95  Ibid. 96  Ibid. 97  Ibid. 98  Ibid. 99  G20 Information Centre, op. cit. 100  G20 Finance Ministers. 2009. “Communiqué of the Meeting of the G20 Finance Ministers and Central Bank Governors”, Sao Paulo, 9 November 9. 93 94

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below the G8’s annual average of about 9,000 words between 1975 and 2008 for example101), the G20 response to financial markets regulation represented a highly detailed initial policy response to the crisis. It is also clear from official G20 documents the degree to which G20 governments agreed to draw upon the use of policy experts in designing the specific legislative, regulatory measures or policy to be taken as it had undertaken to do earlier.102 The rather technical and detailed measures revolved around accelerating reforms to accounting standards in countries, reviewing credit rating agency practices, reviewing banks capital standards, reviewing the regulation and supervision of financial markets and specifically some kinds of financial instruments (like credit default swaps and over-the-counter derivatives transactions), instructing regulators to review banks’ risk management practices, and asking the Basel Committee on Banking Supervision to study the need for and help develop firms’ new stress testing models. There were also numerous measures to enhance international cooperation including regulatory cooperation between jurisdictions on a regional and international level and to establish supervisory colleges for the supervision of major cross-border financial institutions. The to-do list would be rolled out progressively. Governments agreed to “instruct our Finance Ministers, as coordinated by their 2009 G20 leadership [...] to initiate processes and a timeline to [implement] an initial list of specific measures”.103 Such a detailed response was notable for a heads of government meeting,104 especially in policy areas that affected the regulation and supervision of banking and financial markets. Given the fact participants had agreed on measures prior to the summit, the Washington Summit itself therefore was effectively a political event that sent a message to the world that leading economies and their political leaders were responsibly responding to the crisis. After the summit, G20 leaders affirmed the need to coordinate a response and work through a multilateral framework. The official statement noted that while regulation was “first and foremost the responsibility of national regulators” financial markets were “global in scope” and that therefore intensified international cooperation among regulators, stronger international standards and their consistent implementation was “necessary to protect against adverse cross-­border, regional and global developments affecting international financial stability”.105 The reality was, however, that at this stage it was still largely a transatlantic crisis, with emerging economies’ financial markets hit nowhere near as severely as those in the US or Europe. More specifically, and importantly for the financial system at the time, the US and the EU secured commitments from G20 members to introduce and coordinate future fiscal stimulus measures globally. This meant the burden on boosting the global economy rested not only with the US and the EU but also other large emerging economies of Brazil, Russia, India and China which had just been bought in to the G20 system of governance. In fact, it was these economies that provided the  Kirton, John and Guebert, Jenilee. 2009. “A Summit of Substantial Success: The Performance of the G20 in Washington in 2008”, G20 Research Group, 7 March. 102  G20 countries, 2008, op. cit. 103  Ibid. 104  “Not a Bad Weekends Work”, The Economist, 16 November 2008. 105  G20 countries. 2008. “Declaration Summit on Financial Markets and the World Economy”, 15 November. 101

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Overview of global economic stimulus in response to the 2008-09 Crisis (as a % of 2008 GDP, weighted averages)

Fig. 4.1  Stimulus Measures in G20 Countries During the 2008/09 Crisis

Overview of global economic stimulus in response to the 2008-09 Crisis (as a % of 2008 GDP, weighted averages)

Fig. 4.2  Stimulus Measures by World Regions During the 2008/09 Crisis. (Source: International Labour Organization)

largest injections of liquidity in the global financial system broadly. China, which had announced an economic stimulus package worth four trillion Chinese dollars (about US$580 billion) three days earlier on 11 November, spent the most on stimulus funding, at 12.7% of its 2008 GDP. Among the G20 countries, apart from China, Saudi Arabia and Turkey also announced large stimulus packages.106 This took significant pressure of the US and Europe (Figs. 4.1 and 4.2).  International Labour Organization/International Institute for Labour Studies. 2011. “A Review of Global Fiscal Stimulus”, EC-IILS Joint Discussion Paper Series No. 5, Geneva: 3.

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A Role for the IMF Another highly significant achievement was securing a firm place at the crisis resolution table for the IMF. This was, as discussed later, a development that also very much reinforced US and European interests at the time. The key economies of China, India, Brazil and Russia agreed to provide additional funding to the existing financial institutions, the IMF and the World Bank, commitments that were seen as critical by the US and European leaders. In return, the US and European leaders had agreed to widen the IMF’s voting base to provide emerging economies with stronger representation at not only the IMF but also the World Bank and other global institutions. Accordingly, the summit agreed to review “the mandates, governance, and resource requirements” of those international financial institutions and further define “the scope of systemically important institutions and determining their appropriate regulation or oversight”.107 It was also successful in getting agreement to “expand urgently” the role and membership base of the FSF. The US saw broadening the IMF funding base as critical at a time it was facing substantial backlash over its bailout domestically. Europe saw it as critical too, with the European Commission unable to provide bailouts to member states under the European treaties. Some countries like Germany faced considerable voter resistance to the idea of financially supporting member states that need financial assistance. The IMF’s role in state assistance had been waning at the time. Its role had shifted from providing balance of payments relief and lending-­related initiatives and economic restructuring programs to longer-term programs that involved policy changes and came with greater loan conditionality. The economic development of emerging economies and the proliferation of financing alternatives in the 1990s and 2000s such as multilateral and regional developments banks also provided alternatives to the IMF, which was increasingly seen as a US institution. A central role for the IMF meant a central role for the US. As the US and key European countries effectively control the IMF, it also revived and reinforced US and European interests. At the time of the summit, the US held a 17.69% voting share of the IMF and EU member states together held a 32.07% vote. This brought the combined US-EU voting position in the IMF to 49.76%. While this is just under the threshold for passage of IMF voting decisions that require a simple 50% vote, the US, Europe and Japan combined (the richest countries of the IMF) held 55.6% at the time. EU member states always vote together at the IMF as part

 G20 countries. 2008. “Declaration Summit on Financial Markets and the World Economy”, 15 November.

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of an institutionalized practice and, since the IMF’s creation, Europe and Japan have rarely voted against the US.108

The Agenda-Setting Advantage The outcome of the Washington summit was no accident. The decision to seek a solution to the evolving financial crisis with the G7/8 economies first and then the G20, meant that from the start the US and its European counterparts maintained a level of control over the agenda and the eventual outcomes. It is standard practice that the country that holds the G20 presidency hosts the summit. In the G20, as with the previous G7 and G8 meetings, the host country is also tasked with developing the draft discussion agenda.109 It acts as initiator and accepts input from invited countries. The importance of setting the agenda in negotiations has been well noted by scholars. Agenda-setting processes are crucial, as they determine the issues that are taken up for decision-making.110 Given the process of setting an agenda determines what is discussed and actioned and what is not, agenda-setting is a highly political process. Pollack argues that formal agenda-setting power depends on a number of factors that can limit the influence of actors. One limitation is clearly the formal voting and decision-making rules in place. In the G20 context, there are no formal voting or amendment rules. All decisions are reached on the basis on consensus. The absence of formal voting rules means that less influential economies tend to have a diminished opportunity for control over the agenda.

Choice of Forum In addition, the US also had the advantage of choosing the venue. The choice of institution matters, because with each venue comes a distinct set of norms, values, pre-conceptions and procedures. In this respect the venue refers to an institution and not so much the location of a discussion. All political actors, including interest groups and business groups, shop for the best venue for negotiations, either

 Weisbrot, Mark; Cordero, Jose; Sandoval, Luis. 2009. “Empowering the IMF: Should Reform be a Requirement for Increasing the Fund’s Resources?”, Centre for Economic and Policy Research, April. 109  Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012 110  Princen, Sebastiaan. 2007. “Agenda-setting in the European Union: A Theoretical Exploration and Agenda for Research”, Journal of European Public Policy, 14, No. 1: 21–38. 108

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domestically or internationally, to have their issue heard. Governments too have the ability to strategically control policy outcomes through choice of forum.111 From the outset, Baumgartner and Jones describe how political actors can “alter the roster of participants” by seeking out the most favourable institutional venue for consideration of issues”.112 In this case, the choice of venue was the G20—an informal grouping the US and Europe have historically dominated. They are the world’s first and second largest economies, holding roughly 37% of the world’s GDP in 2013.113 At the Washington G20 summit, it was the US and the EU that determined the choice of venue, giving them a further advantage.

Time Horizons Finally the power of an agenda-setter to determine outcomes also depends on the relative time horizons for participants involved. In other words, if the negotiations are restricted to a specific timeframe, parties may be willing to compromise on points to meet the timeframe. A party might at the last moment compromise to satisfy its time preference. This is especially a risk in negotiations of an urgent nature. In the G20 summit context, US and European leaders sought to highlight the need to act quickly from the outset. UK PM Gordon Brown had set the scene even in October by calling for “a new Bretton Woods” that would “create the right new financial architecture for the global age”.114 Speaking several days before the G20 talks, President Bush said that keeping markets operating was “especially urgent”.115 Speaking after the summit, he said Bretton Woods had taken two years to prepare but that the Washington Summit was prepared under urgent circumstances in just three weeks.116 The urgency of the financial crisis and the US and European pressure to respond to the crisis urgently thus restricted the options available to other G20 representatives. At the G20 Leaders’ Summit in Washington, the US and the EU had largely agreed ahead of time on a number of proposals. The priority of many of the issues had been largely determined earlier. It was effectively a transatlantic agenda. Speaking figuratively, the members of the G20 outside the G7/8 had been invited to  Richardson, Jeremy. 2006. European Union: Power and Policymaking (3rd edn), Routledge, London and New York. 112  Baumgartner, Frank R. and Jones, Bryan D. 1991. “Agenda Dynamics and Policy Subsystems”, The Journal of Politics, 53, Issue 4, November. 113  CIA Factbook, data extracted January 2015. 114  Peacock, Mike and Ginsberg, Jodie. 2008. “Brown Calls for New ‘Bretton Woods’ Meeting”, Reuters, 13 October 2008. 115  Bush, George W. 2008. “Bush’s Speech on the Economic Crisis”, Council on Foreign Relations, to Manhattan Institute, New York, November 2008. 116  US Whitehouse. 2008. “President Bush Hosts Summit on Financial Markets and the World Economy”, 15 November. 111

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a meeting that had already started. The US-EU dominance of the G20, as discussed earlier, means that the adoption by the G20 of pre-determined priorities was a ­virtual certainty.

Conclusion The last few months of 2008 tested the US-EU alliance like it had not been tested for decades. The collapse of US investment bank Lehman Brothers in September was the trigger for an urgent need to coordinate a major transatlantic response to the crisis. Despite a massive US bailout plan and some EU member states’ efforts to bail out their banks, it was clear to EU leaders that they alone could not provide the sort of response needed to restore financial stability. They led the push, initially at the G7, to coordinate transatlantic response, which the US subsequently took to the G20. With the benefit of having set the agenda for the G20 Leaders’ Summit in Washington on in November, the US led calls for what would later be called a global solution to a global problem. It led the efforts to coordinate global stimulus plans to restore financial stability as well plans to coordinate financial regulatory reform globally, a move proposed and pushed by European leaders, who saw the regulatory shortcomings that caused the crisis as originating in the US. This period represented a distinct peak in transatlantic intergovernmental cooperation. It was also a period in which financial markets issues were thrust abruptly onto the intergovernmental agenda and that signalled the start of an extensive financial regulatory reform program that lasted several years. Several issues raised in this chapter are explored in later chapters, including the role that transatlantic cooperation on coordinating financial markets issues has on international financial governance.

Chapter 5

The Role of Transgovernmental and Transnational Dialogue in Financial Markets Cooperation

Networks of regulators have developed rapidly in the postwar period. In the area of banking and financial markets, central bankers were among the first non-state actors to play a formative role in shaping non-state international relations. Their role was even entrenched into the international system by the formation of the Bretton Woods international financial institutions after the war, the International Monetary Fund (IMF) and the World Bank. In recent decades transgovernmental actors, from regulators, central bankers and government agency commissioners, have become the “new diplomats”.1 Moreover, they have become actors in and shapers of the international order in themselves. They are now policy shapers as well as policy makers. As scholarly debate began to examine new forms of governance in the EU notably, efforts were made to conceptualize transatlantic political cooperation as a form of governance. It was not until the late 1990s that transgovernmental and transnational actors began to play a more important role in financial markets regulatory discussion and policy specifically. The reasons are several, including that the EU had started to implement an extensive financial services legislative program, heightening concerns among US financial institutions in a way not done so before. Another is that the level of financial markets and trade interdependence between the US and the EU was such that greater bilateral financial markets cooperation and coordination was imperative. A third reason was that as the US sought to improve its position in the changing global economy, it viewed its European counterpart as crucial to reach certain goals. This chapter aims to explore and discuss the role of transgovernmental and transnational actors in transatlantic financial markets cooperation, conceptualizing the subject, the historical context, and milestones in the emergence of bilateral financial

1  Slaughter, Anne-Marie. 1997. “The Real New World Order”, Foreign Affairs, 76, No. 5, September/October.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_5

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markets regulatory cooperation in key sectors. It discusses diverging patterns in regulatory cooperation, reasons for the development of the US-EU relationship, the predominant forms of regulatory cooperation used in the US-EU context, and the institutionalization of financial regulatory cooperation in 2002. It finishes with a discussion on how bilateral transatlantic regulatory cooperation intensified during the global financial crisis.

Conceptualizing Transgovernmental In the 1970s amid the increasing focus on the role of non-state actors in policy development domestically and internationally, Keohane and Nye defined transgovernmental relations as “sets of direct interactions among sub-units of different governments that are not controlled or closely guided by the policies of the cabinets or chief executives of those governments”.2 They also sought to distinguish transgovernmental actors from transnational actors and argued that they both affected interstate politics by altering the “choices open to statesmen and the costs that must be borne for adopting various courses of action”.3 Huntington, another scholar picking up the debate as to transnational actors, preferred to refer to them instead as non-­ government and being corporate in nature.4 In the EU, transgovernmental actors in the area of financial markets policy are the officials in key directorate-generals such as the former Directorate-General for Internal Market (DG MARKT) and now the Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs. The financial markets regulatory circle is broader in the US, with numerous financial regulatory agencies working in the domains of banking, securities, insurance and other sectors. In the EU, the principal regulator is the European Commission, which is also the sole initiator of legislation. The three more recently established financial regulatory agencies, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority, are subordinate and answer to the Commission. The other major financial regulatory player in the EU is the European Central Bank (ECB). In the US, the key financial markets regulators are US Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC) and its subordinate offices.

 Ibid.  Ibid: 727. 4  Huntington, Samuel P. 1973. “Transnational Organizations in World Politics”, World Politics, 25, No. 3: 336. 2 3

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Historical Context Transgovernmental and transnational actors have played roles in discussing, negotiating, coordinating and developing policy for some time. Among the earliest non-­ state actors involved in international cooperation or policy coordination were central banks. Some scholars have traced central bank cooperation to the mid nineteenth century, when the Banque de France and the Bank of England engaged in a series of transactions related to financial and exchange crises at the time. In one example the Bank of England provided the French with silver and gold to help it manage a crisis.5 Central bank cooperation continued through to the interwar period, with one example the League of Nations’ programme to assist the new states in setting up their financial systems and stabilizing economies. Another is the Bank of England’s loan in 1923 to the National Bank of Austria in anticipation of proceeds from a League of Nations stabilization loan. The first institutionalization of central bank cooperation came with the creation of the Bank for International Settlements (BIS) in 1930. Created to administer the Young Plan of 1930, which outlined reparation payments imposed on Germany under the Treaty of Versailles following WW1, the bank was established through an intergovernmental agreement between the United States, the United Kingdom, Germany, Belgium, France, Italy, Japan and Switzerland. The bank’s reparations management soon faded and it moved towards facilitating interbank cooperation. It sought to seek agreement on issues such as an acceptable standard of gold bars, sharing of information on the storage of monetary gold, so as to avoid or reduce shipment costs from capital to capital. It also sought to facilitate foreign exchange clearing to enable central banks to affect foreign exchange transactions directly rather than through exchange markets and convened a number of conferences on technical banking issues.6 After WW2, in a reformed financial system following the Bretton Woods conference, central banks continued to cooperate on issues of standards, information sharing, exchanging views, developing ideas of economic outlook and standardizing concepts and even regulatory preferences. The BIS expanded its activities, creating a Markets Committee (formerly the Committee on Gold and Foreign Exchange) in 1962 following the formation of the so-called Gold Pool, a pool of gold reserves by a group of eight central banks in the US and seven European countries to maintain the Bretton Woods System of fixed-rate convertible currencies and defend the gold price. At the same time, throughout the 1960s, international banking continued to expand dramatically as a consequence of enormous growth in world trade and foreign direct investment, as US and European banks followed their multinationals

5  Flandreau, Marc. 1997. “Central Bank Cooperation in Historical Perspective: A Sceptical View”, The Economic History Review New Series, 50, No. 4 (Nov): 735. 6  The Establishment of the BIS, Bank for International Settlements, www.bis.org

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around the world, financial innovation, with banks expanding their securities, mergers and acquisition, fund management, and derivatives activities, and rapid innovations in technology and communications.7 The result was an increase in the number of banks working cross-border. In 1971 the US abandoned the Gold Standard, with President Nixon announcing on August 15 that the US would no longer convert dollars to gold at the previously set fixed rate. At the BIS, the Committee on Gold and Foreign Exchange broadened its interest area to financial market developments and assessing current events as well as monitoring longer-term structural trends. A further committee was established in 1971, the Committee on the Global Financial System (formerly known as the Euro-currency Standing Committee) to monitor international banking markets. By the 1970s, non-state actors had become entrenched in international politics. As Anne-Maree Slaughter noted in her book A New World Order, American economic and academic Francis Bator testified before Congress in 1972 that “it is a central fact of foreign relations that business is carried on by the separate departments with their counterpart bureaucracies abroad, through a variety of informal as well as formal connections”.8 The risk inherent in the growth of international banking and the collapse of the fixed exchange rate system had international consequences in the mid-1970s. After the Organization of Arab Petroleum Exporting Countries in October 1973 announced an oil embargo in response to the US support of Israel, international stock markets plummeted, placing the commercial banking structure under severe strain. The crisis aggravated inflationary pressures and balance of payments problems in Europe.9 In 1974, in the midst of the oil crisis following the Arab oil embargo the year prior, the West German bank Bankhaus Herstatt collapsed, having lost more than $200 million in foreign-exchange dealings,10 and leaving huge commitments to other international institutions that could not be met. The following year the collapse of Franklin National Bank of New  York prompted leading central bankers and bank supervisors to come to a consensus to create voluntary guidelines for future collaboration.11 One of these was an understanding in which the home states of cross-­border banks would be responsible for their supervision and any bailouts.

 Cranston, Ross. 2002. Principles of Banking Law, 2nd ed, Oxford University Press, Oxford: 424.  Slaughter, Anne-Marie. 2004. A New World Order, Princeton University Press: 10. 9   Papaspyrou, Theodoros. 2004. “EMU Strategies: Lessons from Greece in View of EU Enlargement”, paper presented at the Hellenic Observatory, The European Institute, London School of Economics, 20 January. 10  Farnsworth, Clyde H. 1974. “Failure of Herstatt Disturbs Banking”, New York Times, June 29. 11  Pauly, Louis W. 2009. “The Old and the New Politics of International Financial Stability”, Journal of Common Market Studies, 47. Number 5: 963. 7 8

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The Emergence of Financial Regulatory Networks International bankers intensified their efforts in standards setting and coordination. Central banks of the G10 countries felt that international cooperative efforts should be stepped up to stabilize the international banking system, and towards the end of 1974, the Committee on Banking Regulations and Supervisory Practices was established, later becoming today’s Basel Committee on Banking Supervision (BCBS).12 Based at the BIS in Basel, the committee aimed to enhance financial stability by improving the quality and monitoring of banking supervision worldwide, plus serve as a forum for regular cooperation on banking supervisory matters. After the first meeting in February 1975, meetings have been held regularly three or four times a year since. The committee has since developed a wide range of standards including the Basel Accords, a series of banking regulations that establish minimum banking prudential requirements, that have implemented throughout the world’s leading industrialized economies. In the following decade, regulators in other financial markets sectors began building their own agreements. The creation of the International Organization of Securities Commissions (IOSCO) in 1983 highlights similar efforts to set standards and improve cooperation in the area of securities trading. IOSCO was created in 1983, when 11 securities regulatory agencies from North and South America evolved their inter-American regional association into an international cooperative body. A year later, securities regulators from France, Indonesia, Korea and the United Kingdom joined. It is now the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector. In subsequent years, further committees were created at the BIS. A Committee on Payment and Settlement Systems (CPSS) in 1990 as a follow-up to the work to extend the activities of the bank’s Group of Experts on Payment Systems, the Irving Fisher Committee on Central Bank Statistics in 1995 to discuss and coordinate statistical issues, the Financial Stability Institute (FSI) in 1998 by to assist banking supervisors on financial system matters, and the Financial Stability Forum (FSF) in 1999. By the 1990s, the three channels of bilateral cooperation to which Pollack and Shafer refer13—intergovernmental, transgovernmental and transnational—as well as multilateral, were firmly established as separate channels in which the US and the EU discussed, negotiated and even formed policy. Rather than taking over policy domains from governments, central banks, and networks of regulators, supplemented them as forms of discussion and standards setting.

 Goodhart, Charles. 2011. The Basel Committee on Banking Supervision A History of the Early Years 1974–1997, Cambridge University Press. 13  Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford. 12

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Bilateral Financial Markets Regulatory Cooperation In the 1990s the multilateral environment in which the US and major European economies worked began to be supplemented by a bilateral relationship. International cooperation in the postwar period on a range of issues had tended to take place in multilateral fora. As discussed above, this is also the case in respect to financial markets cooperation in areas such as banking, securities and insurance among other sectors. The US and the largest countries in the EEC were the formative and central participants in the major international financial institutions, such as those mentioned earlier. In the pursuit of trade objectives to reduce technical barriers to trade, prevent the emergence of new barriers, the EU pursued various strategies including working within the multilateral rules such as the WTO Agreement on Technical Barriers to Trade signed in 1995, conclude bilateral agreements to reduce barriers mainly mutual recognition agreements (MRAs), maintain dialogues to facilitate understanding of technical matters and regulatory co-operation with a view to either harmonizing standards or achieving “best regulatory practice”.14 As such, in the area of banking, both the US and major European economies worked through the BIS various committees, through IOSCO in the area of securities, and later in the area of insurance, the International Association of Insurance Supervisors (IAIS), which was formed in 1994. A membership organization of insurance supervisors and regulators from more than 200 jurisdictions that sets international standards, it was hosted at the BIS, which was instrumental in its creation. In the late 1980s and 1990s, US regulators and European Commission officials began to form more bilateral cooperation agreements in respect to financial markets. Among the first issues to emerge was that of accounting standards. There had been concerns as early as the 1960s over different standards in use around the world with many in the accounting profession widely in favor of the harmonization of accounting and auditing principles.15 The US has used its own US GAAP (Generally Accepted Accounting Principles) since 1939, which are based on standards developed by the American Institute of Certified Public Accountants. In Europe, the use of accounting standards had historically varied from country to country, largely as a result of cultural differences, differences in legal, financial and taxation systems and in the role and influence of the accountancy profession in various countries.16 In the 1970s and 1980s a number of European Community initiatives aimed to effectively  Commission of the European Communities. 2001. “Implementing Policy for External Trade in the Fields of Standards and Conformity Assessment: A Tool Box of Instruments”, Commission Staff Working Paper, Brussels, 28 September, SEC(2001) 1570. 15  “Remarks of Philip R. Lochner, Jr. Commissioner, U.S. Securities and Exchange Commission: The U.S. Role in Achieving International Harmonization of Accounting Standards”, speech at the 10th Annual SEC and Financial Reporting Institute Conference Los Angeles, California, May 16, 1991. 16  Dewing, Ian and Russell, Peter. 2008. “Financial Integration in the EU: The First Phase of EU Endorsement of International Accounting Standards”, Journal of Common Market Studies, 46. No. 2: 243–264. 14

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harmonize internal market standards for the business community. The company law directives of 1978 and 1983 for instance and a directive on the annual accounts of public limited liability companies established a requirement for individual companies to prepare harmonized accounts. However, demand from non-US companies that wanted to maintain access the US capital markets played a big role in the push for not just intra-European accounting harmonization but also international harmonization.17 The 1980s saw the growing use by international companies of the well-established US GAAP, at a time when not only the EU lacked a common standards environment but also foreign companies eagerly sought access to the US market.18 The EU could have embraced US GAAP standards but embraced the International Financial Reporting Standards (IFRS) instead, which had first been developed in 1973. The US felt its well-­ established standards were paramount in maintaining the integrity of the US securities market. The varying standards also had an effect on US profitability and in turn investor confidence. One US concern for example was that the varying notions of goodwill could cause major differences in the post-acquisition reported income of US companies compared to that of foreign companies.19 This led to a simmering dispute between the US and the EEC that involved regulators, not heads of government, in a largely industry-based debate.20 Efforts to agree on a single set of standards began in the 1980s but has had little success (even three decades later). The EU, however, adopted IFRS (International Financial Reporting Standards) in 2002 and, despite a Memorandum of Understanding signed in September 2002 referred to as the Norwalk Agreement. The agreement between the US-based Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to move towards harmonization has been regarded as a failure with the two sides failing to create a converged set of standards so far.

Bilateral Securities Cooperation A further area of increasingly emerged bilateral cooperation was securities. In 1991, the European Commission and the US Securities and Exchange Commission (SEC) signed an agreement to exchange information and provide mutual assistance on

 See Camfferman, Kees and Zeff, Stephen. 2007. Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee 1973–2000, Oxford University Press, Oxford: 10.; Posner, Elliot. 2010. “Sequence as Explanation: The International Politics of Accounting Standards”, Review of International Political Economy, 17, No. 4: 640. 18  Posner, op. cit. 19  “Remarks of Philip R. Lochner, Jr. Commissioner, U.S. Securities and Exchange Commission: The U.S. Role in Achieving International Harmonization of Accounting Standards”, speech at the 10th Annual SEC and Financial Reporting Institute Conference los Angeles, California, May 16, 1991. 20  Posner, Elliot. 2009. “Making Rules for Global Finance”, International Organization, 63, No. 4: 675. 17

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securities law enforcement and maintaining the financial integrity of market participants.21 A key issue at the time was the need to procure evidence from foreign nations and regulators as part of fraud investigations. The US had faced resistance from regulators abroad and in one instance the UK Department of Trade and Industry once refused a SEC request for a telephone number.22 Such problems had led the SEC to form Memoranda of Understandings with agencies abroad, such as the UK in 1986. However, the agreement went a little further than just market integrity and enforcement. It also sought to establish agreement to consult regularly on matters of mutual interest concerning operation and oversight of the securities markets generally. This applied to matters on a bilateral basis as well as working in multilateral fora. The US held other concerns that motivated bilateral engagement with the Europe. Political level negotiations in Europe towards full economic and monetary union were progressing, and member states had agreed to create a common European financial area for the EEC, which would incorporate the four countries in the European Free Trade Area as well, Iceland, Liechtenstein, Norway and Switzerland. The European Commission viewed developing a single securities markets as a priority23 and this would provide international investors with a second huge single securities market that would rival the US in which to invest. As this would involve creating single European standards and single European rules, it represented a major challenge to the US. The challenge was not so much in respect to the potential competition but the US was concerned about the development of rival European standards and their potential adoption in the international environment.24 The issue of accounting standards was important in the area of securities too, as they define key accounting terms such as asset, debt and also deal with issues of valuation, all issues for which the treatment differed under GAAP and IFRS. The US wanted European accounting standards harmonized to US standards believing it could “increase dramatically the willingness of foreign issuers to participate in the US securities markets”.25 It viewed that establishing capital rules, harmonizing international disclosure standards, and markets enforcement cooperation were vital to the protection of markets and investors.26  European Commission. 1991. “Joint Statement on the Establishment of Improved Cooperation between the United States Securities and Exchange Commission and the European Commission of the European Communities”, 23 September. 22  Fishman, James J. 1991. Enforcement of Securities Laws Violations in the United Kingdom, International Tax & Business Law, 131, 9: 192. 23  “The Structure of the European Securities Markets in the Nineties”. 1991. Speech by Sir Leon Brittan to the Federation of EEC Stock Exchanges, Amsterdam, 15 November. 24  “Remarks of Philip R. Lochner, Jr. Commissioner, U.S. Securities and Exchange Commission: The U.S. Role in Achieving International Harmonization of Accounting Standards”, speech at the 10th Annual SEC and Financial Reporting Institute Conference los Angeles, California, May 16, 1991. 25  Ibid. 26  Fleischman. Edward H. 1989. Commissioner Securities and Exchange Commission, “Address to the Conference on Global Investment & Risk Management of the Futures Industry Association and 21

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The US and the EU regulatory dialogue also extended to other significant decision-­making bodies in the EU. US regulators had maintained in the years leading up to the crisis an active dialogue with the Committee of Securities Regulators (CESR), the EU-level committee of member states supervisors established in 2001 to coordinate supervision and harmonize regulation among member states. The SEC’s dialogue with the CESR formed part of the broader regulatory dialogue under the Transatlantic Economic Partnership.

Diverging Patterns by Sector As an increasing level of bilateral US-EU cooperation accelerated in the 1990s, another pattern appeared in which some financial markets sectors saw greater bilateral cooperation than others. Securities cooperation increasingly took place in the bilateral context. While the international body IOSCO assumed a role in negotiating standards, issues of specific concern to the transatlantic environment saw US regulators and the European Commission discussing and negotiating a wide range of issues on a bilateral basis such as disputes over accounting standards, stock exchanges, financial conglomerates among others. In the area of banking, cooperation tended to continue to take place in the multilateral context. The BIS and its various committees, including the BCBS, continued to be the pre-eminent rulemaking environment for international banking standards and, by extension, transatlantic banking. Discussion on the Basel capital requirements rules commonly known as the Basel Capital Accord, were negotiated in the G10 environment, with the final rules released in 1998. Similarly, the Basel II revised framework that comprised three pillars, minimum capital requirements, supervisory review process, and market discipline, released in June 2004, were also negotiated among central bank members. In the US, the four US Federal banking agencies—the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision—played a major role in their drafting. In Europe, eight member states including five European countries have continued to play a significant role in the BIS and its committees, despite the ECB taking over exclusive legal competence for the euro currency at the start of 1999.27 While the US and European central banks and, since its creation the ECB, have continued to maintain dialogues, discussion and coordination over cross-border banking, standards and rules development has taken place primarily through these fora. Basel rules have tended to be incorporated largely entirely into domestic legislation. The Basel II accords for examples were transposed with only some modifications into

Futures and Options World”, London Wednesday, June 14, 1989. 27  Eight countries are founding members of the BIS, notably Germany, Belgium, France, the United Kingdom, Italy, Japan, the United States, and Switzerland.

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EU the Capital Requirements Directive III (2006). Issues of market access were based on the principle of national treatment. As discussed above, the European Second Banking Directive adopted in 1989 generated considerable tension and prompted considerable bilateral negotiation between the US and the European Commission,28 but largely banking regulatory cooperation has remained multilateral. Indeed, Quaglia contends that transatlantic regulatory cooperation in banking has been subject to “ebb and flow”. She found its overall intensity increased in the late 1990s and early 2000s, only to decline after the international financial crisis, even though information exchange increased.29

Shift of Influence Towards ECB One significant change in the area of banking, however, was that the shift of influence away from member states towards supranational authority became pronounced after the ECB gained competence over the euro on 1 January 1999. Established in 1998 by the Treaty of Amsterdam,30 the ECB was given sole legal competence for the euro currency and monetary policy throughout the Eurozone and heads the European System of Central Banks (ESCB), which also includes the national central banks of states that have adopted the euro. In June 1998, the European Monetary Institute, the forerunner of the ECB, was formerly replaced by the ECB in the BIS. After the introduction of the euro on 1 January 1999, national central banks of the 11 Eurozone member states transferred their monetary policy function to the ECB, with other EU states that later joined the Eurozone, Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia, and Lithuania doing so from 2001 to 2015. Each US member state has share capital in the ECB. The ECB later gained a greater role in overseeing financial stability in the Eurozone through its newfound role in the European Systemic Risk Board (ESRB) in 2010. Later on, under legislation that entered into force in 2010, the bank was tasked with macro-prudential oversight of the Eurozone financial system as a whole. With a Secretariat in Frankfurt am Main in Germany, not too far from the headquarters of the ECB, management of the ESRB was given to the ECB. The US viewed the ECB as central to its interests in Europe. Given the bank’s increasingly critical role in the EU and the importance of European financial stability to the US, the US Treasury increasingly turned to the ECB to discuss issues of common concern. These included efforts to coordinate a common policy response to the evolving crisis, consulting on matters such as market liquidity activity, the deteriorating  Story, J. Walter I. 1997. Political Economy of Financial Integration in Europe: The Battle of the System. Manchester: Manchester University Press. 29  Howarth, D. and Quaglia, L. 2016. ‘The “ebb and flow” of transatlantic regulatory cooperation in banking’, in Journal of Banking Regulation, advance online publication, 20 January 2016. 30  Officially the Treaty of Amsterdam amending the Treaty on European Union, the Treaties establishing the European Communities and certain related acts. 28

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economic situation in certain EU member states and matters to do with banking market conditions.31

Reasons for the Development of Bilateral Financial Relations There are several major reasons for the development of a bilateral regulatory relationship in the area of banking and financial markets between the US and the EU in the 1990s. The first is dispute management and risk mitigation. A series of disputes and conflict over standards, concerns about market access and operational issues raised the need to reduce the risk and impact of disputes. The liberalization of financial markets in the 1970s and 1980s led to enhanced competition between the US and the EU in each other’s markets and also on the world stage. This led to rising levels of financial markets interdependence that led to US-EU specific problems that were better addressed through bilateral negotiation.32 Some of these were fairly technical in nature. For example, one dispute concerned stock exchanges, with European national and EU officials wanting stock exchanges to be able to place screen monitors on traders’ desks throughout the US and Europe without having to comply with additional regulatory requirements.33 Other disputes were broader and concerned specific legislative changes. For example, as part of an effort to maintain financial system stability, the EU Financial Conglomerate Directive in 2002 aimed to manage financial risks inherent in groups of companies that were active in more than one financial sector. One of the outcomes was that US conglomerates not regulated by their host countries in a way deemed “equivalent” in Europe could be subject to the legislation’s extraterritoriality. SEC chairman Harvey Pitt said there was “considerable concern” at the SEC that if the EU authority charged with making equivalence determinations decided that the SEC’s supervision of securities firms at the holding company level was not equivalent to the European standards, the result would be to increase the cost to US firms of doing business in Europe.34 Such disputes were specific in nature and are entirely appropriate to address on a bilateral basis. The growth of US-EU financial interdependence and the significant effect of such changes on US firms and vice versa exaggerated the need for bilateral discussion. The proliferation of a new range of policies from central bank decisions, government competition and regulatory policy, and legislative changes began to

 Author interview with US Treasury representative, Brussels, 14 February 2014.  Cranston, Ross. 2002. Principles of Banking Law, 2nd ed, Oxford University Press, Oxford. 33  Posner, Elliot. 2009. “Making Rules for Global Finance”, International Organization, 63, No. 4 (Fall, 2009): 671. 34  Pitt, Harvey L., SEC Chairman. 2002. “A Single Capital Market in Europe: Challenges for Global Companies”, Conference of the Institute of Chartered Accountants of England and Wales, Brussels, Belgium, October 10. 31 32

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have strong repercussions on the other side of the Atlantic.35 The US was concerned that the Commission did not stray from what the US viewed as the established transatlantic consensus. The suggestion by US Secretary of Commerce Robert Mosbacher in 1989 that the US should be given “a seat at the table” as an observer of internal EU discussions about European standards setting could be seen as part of an effort on the part of the US to “steer” Europe in the US direction.36 The second reason was the containment of the EU’s role in global standards setting. As the EU began to harmonize the internal markets in the late 1980s, one implication of a single approach to and set of European standards was that they could be adopted, and even preferred, by multinational corporations and financial firms. The Single European Act had been signed in February 1986 in Luxembourg and The Hague, a year that also saw Spain and Portugal joining the EC. Entering into force on July 1, 1987, it set the scene for a single European market that would present major challenges to the US economically in terms of security and also in terms of continuing to do business in Europe. The Act consolidated the “four freedoms”: freedom of movement of goods, services, people and capital.37 In financial services, while the First Banking Directive of 1977 aimed to start the process of harmonization, it was a modest first step in doing so.38 It mostly established legal terms for the freedom of European Community (EC) banks to establish branches in another member state. The European Second Banking Directive, adopted in 1989, introduced the principle of home state control and allowed banking supervisory authorities in member states to rely on each other’s supervision. Moreover, associated directives set definitions and standards around solvency ratios and banking management among other areas. Foreign banks were given national treatment status but the impact of the EU setting standards for banking not only raised concerns about maintaining market access in the US but threatened US dominance. As the decade progressed, Europe’s capacity as an actor on the international stage was becoming vastly more significant.39 In addition, bilateral trade agreements were narrower in focus and are easier to negotiate and often laid the groundwork for larger accords.

35   Eichengreen, Barry. 1998. Introduction, in: Barry Eichengreen: Transatlantic Economic Relations in the Post-Cold War Era, Council on Foreign Relations Press, Washington. 36  Peterson, John. 1996. Europe and America: The Prospects for Partnership, Routledge, New York: 47; Pine, Art. 1989. “The White House Softens Its Tough Trade Rhetoric”, Los Angeles Times, June 4, 1989. 37  The Single European Act also codified European Political Cooperation, the forerunner of the European Union’s Common Foreign and Security Policy (CFSP). 38  First Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions. 39  Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes Princeton University Press, Princeton, New Jersey.

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Forms of Regulatory Cooperation at Transgovernmental Level As the 1990s progressed, clear preferences for particular types of cooperative agreement became apparent. The start of bilateral regulatory cooperation in the area of financial markets really began in 1995, when the European Community and the US adopted, at sub-cabinet level, a statement of “Principles of Regulatory Cooperation” that set out an approach for bilateral regulatory cooperation going forward. Broadly, regulatory cooperative agreements are agreements reached between regulators and, as such, transgovernmental in nature. Most often, regulatory agreements take specific forms, including joint rule making, recognition of international standards, and MRAs.40 Often referred to as International Regulatory Cooperation (IRC) agreements, there are numerous types (Table 5.1). Table 5.1  International Regulatory Cooperation Agreements used in the US-EU Context Type Information Exchanges and Dialogues Informal Agreements

National Treatment

Mutual Recognitions Agreements

Regulatory Equivalence (sometimes called enhanced MRAs with equivalence of regulatory requirements) Harmonization/Policy Convergence

 Description Exchange of information usually for cooperation or enforcement purposes Declarations in which country agree to particular points A principle in which foreign firms or goods or services are treated the same as those of domestic origin Agreements in which countries agree to recognize one another’s compliance with standards decision or process

These agreements recognize not just conformity with standards but recognition of regulatory requirements A state in which countries have agreed to abide by the same sets of rules or standards.

Example Transatlantic dialogues Financial Markets Regulatory Dialogue Memorandums of Understanding

UNCTAD agreements

US-EU Customs and Co-operation Agreement (1996) US-EU the Mutual Recognition Agreement (1997) US-EU the Science and Technology Agreement (1997) US-EU Comity Agreement (1998) US-EU Veterinary Equivalency Agreement (1999) Regulatory Equivalence décisions

The standards developed by international financial institutions that are subsequently adopted by countries into their domestic legislation. For example, the Minimum Capital Adequacy Ratio Under Basel III

 Correia de Brito, A., C. Kauffmann and J. Pelkmans. 2016. “The contribution of mutual recognition to international regulatory co-operation”, OECD Regulatory Policy Working Papers, No. 2, OECD Publishing, Paris.

40

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Information Exchanges and Dialogues Information exchange and dialogues have long been a mode of regulatory cooperation in the transatlantic context, both in respect to informal arrangements and under particular agreements. Under the Transatlantic Declaration in 1990, both sides pledged to “inform and consult each other on important matters of common interest, both political and economic”41 while under the New Transatlantic Agenda (NTA) in 1995 they pledged to “intensify our cooperation aimed at sharing information, coordinating assistance programmes and developing common actions”.42 Such dialogues also have the aim of fostering trust and confidence and building relationships. Under the TAD for example both sides pledged to “inform and consult each other on important matters of common interest, both political and economic, with a view to bringing their positions as close as possible”.43 However, as a form of cooperation, information exchange and dialogue were only first enshrined in agreed terms in the Transatlantic Economic Partnership (TEP) in 1998. It further committed both sides to a regular government-to-­ government dialogue and created fora for industry input. These included the Transatlantic Business Dialogue (TABD), a regular forum that brings together annually hundreds of CEOs from US and EU firms and high-level government officials to exchange views on regulatory and standards matters.44 Also created were the Transatlantic Labor Dialogue (TALD), the Transatlantic Environmental Dialogue (TAED), the Transatlantic Consumer Dialogue (TACD), and the Transatlantic Legislator’s Dialogue, a parliamentary relationship created that involved bi-annual meetings of the European Parliament and the US Congress on specific topics of mutual concern.45 The TEP went further creating regular meetings and regular summits. It set up a series of meetings of finance ministers, deputy ministers and regulators as well. These became the key forms of dialogue so far as intergovernmental and transgovernmental channels were concerned. The first information exchange agreement between the US and the then-EEC was in 1991 with the EC-SEC Agreement on Securities in 199146 mentioned earlier. It established a pattern that could be built upon later. It was not until 2002 that the Financial Markets Regulatory Dialogue (FMRD) that information exchange and dialogue was extended to other financial markets issues.

 “Transatlantic Declaration on EC-US Relations”. 1990. European Commission.  “New Transatlantic Agenda”. 1995. European Commission. 43  “Transatlantic Declaration on EC-US Relations”. 1990. European Commission. 44  “History and Mission”, Transatlantic Business Dialogue, Washington, D.C. and Brussels. 45  “Transatlantic Legislators’ Dialogue”, European Parliament, Strasbourg. 46  Joint Statement of the Establishment of Improved Cooperation Between the United States Securities and Exchange Commission and the Commission of the European Communities, September 23, 1991. 41 42

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Informal Agreements Frequently formal agreements start out as informal talks and lead to more formal agreement. Sometimes agreements are merely declaratory and are aimed at promoting cooperation generally. Agreements pertaining to international banking and finance have been reached only informally. In many cases they take the form of “declarations” or “joint statements” and are in effect non-binding or “gentleman’s agreements” that sometimes lead to more formal agreement. The TD, NTA and TEP agreements were all of this nature. All intergovernmental agreements, they signaled the start of renewed relations and created frameworks for regulators and other transgovernmental actors in which to work. An example agreement of this type was the EC-SEC Agreement on Securities in 1991 above.47 However, most of the inter-­regulator agreements between the US and the EU since the mid 1990s took the form of MRA or regulatory equivalence decisions (see below). Several US-EU bilateral financial-related agreements have been adopted in the decade since (Table 5.2).

Table 5.2  Key informal US-EU bilateral financial-related agreements Agreement Transatlantic Declaration New Transatlantic Agenda Transatlantic Economic Partnership The U.S.-EU Positive Economic Agenda on Financial Markets Issues EU-US Roadmap for Regulatory Cooperation EU-US Declaration: Initiative to Enhance Transatlantic Economic Integration and Growth Framework for Advancing Transatlantic Economic Integration Between the United States of America and the European Union Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information

47

 Ibid.

Year Nov 1990 Dec 1995 May 1998 May 2002 June 2004 June 2005 April 2007

Parties US-European Community US-EU US-EU US-EU US-EU

US-EU

2015

2015

ECB and the Office of Financial Research, a department of US Treasury

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National Treatment In respect to the US and EU, national treatment has been the “default” mechanism for facilitating market access to each other’s markets. A principle in international law rather than a mechanism for cooperation, it involves a host country extending to foreign investors treatment that is at least as favourable as the treatment that it accords to national investors in like circumstances.48 In other words, it gives others the same treatment as one’s own nationals. An established principle among OECD countries, it is also found in all three of the main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), to which the US and EU are parties, although the principle is handled slightly differently in each of these. National Treatment Rules have also been widely adopted in EU Regional Trade Agreements. The US International Banking Act of 1978 also specifically adopts a specific policy of national treatment for foreign banks. However, implementing national treatment can be difficult, especially when it comes to conglomerates in numerous jurisdictions subject to a range of regulations or supervisory approaches. In the transatlantic context, there has to be a mechanism for national treatment, which in practice includes mutual recognition or equivalence decisions for example.

Mutual Recognition Agreements MRA are agreements in which countries agree to recognize the compliance of a firm, product or service with standards or regulatory requirements in its home country and have become a dominant approach to regulatory cooperation over the last several decades. Defined as a “principle of international law whereby states party to a MRA recognize and uphold legal decisions taken by competent authorities in another member state”,49 they are essentially a form of trade agreement. The goal of an MRA is to facilitate mutual market access by eliminating duplicative testing and certification or inspection procedures.50 Under an MRA, the testing and certification of goods in one country is acceptable in the other country for the purpose of its standards or certification. The same applies to services, which may be subject to various regulatory requirements.51 MRAs are of economic significance because they can eliminate redundant testing and certification costs. These were championed by the EU as part of its efforts to harmonize the internal markets as a pragmatic and the

 “National Treatment”. 1999. UNCTAD Series on issues in international investment agreements, United Nations, New York and Geneva. 49  “Mutual Recognition Agreements (MRAs)”, Regulatory Policy, OECD, Paris. 50  Correia de Brito, A., C. Kauffmann and J. Pelkmans. 2016. “The contribution of mutual recognition to international regulatory co-operation”, OECD Regulatory Policy Working Papers, No. 2, OECD Publishing, Paris: 10. 51  TABD. 48

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most seamless way to achieve harmonization in various EU member state sectors. MRAs could reduce expenses and time and unpredictability and benefit SMEs particularly by enabling testing and certification to be carried out locally. This mitigates the risk that conformity assessment could be used to protect domestic manufacturers and facilitate long-term regulatory cooperation and assist regulatory efficiency.52 Mutual recognition was enshrined into EU case law in the famous Cassis-de-­ Dijon53 case of the Court of Justice of the European Union (CJEU) in February 1979. It held that an EEC member state must allow a product lawfully produced and marketed in another member state into its own market, unless there are justifiable exceptions relating to state mandatory requirements in the areas such as health and safety protection. The case inspired the proliferation of MRAs throughout Europe in the 1980s as part of the efforts to deepen the European internal market with create new methods of removing regulatory barriers. The notion of mutual recognition is broad and there is a spectrum of MRAs, including those incorporated into trade agreements, standalone agreements, MRAs without equivalence of regulatory requirements, enhanced MRAs with equivalence of regulatory requirements, multilateral non-binding MRAs, or Agreements on Conformity Assessment and Acceptance of Industrial Products (ACAAs).54 The latter involves conformity assessments (i.e., product safety testing) which could encompass inspection, testing, certification, and licensing according to technical regulations and standards. They do not require states to harmonize rules. “Enhanced” MRAs involve not only the recognition of testing and certification regimes etc. also the rules of another state.55 Mutual recognition in the area of financial services was not on the political agenda until in the late 1990s. Despite the implementation of several MRAs in various sectors agreements, financial services were not an area of priority for the Commission until the latter part of the decade. The first proposal for a financial services MRA was in 1998, when Sir Leon Brittan, Vice-President of the European Commission, floated the idea.56 The principal efforts in regulatory cooperation, on a multilateral, plurilateral, and bilateral basis, related to key industrial sectors such as  Communication from the Commission: Community External Trade Policy in the Field of Standards and Conformity Assessment, Commission of the European Communities, Brussels, 13 November 1996. 53   Judgment of the Court of Justice of 20 February 1979, Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein. 54  Correia de Brito, A., C. Kauffmann and J. Pelkmans. 2016. “The contribution of mutual recognition to international regulatory co-operation”, OECD Regulatory Policy Working Papers, No. 2, OECD Publishing, Paris: 18. 55  “Priorities for Bilateral/Regional trade related activities in the field of Mutual Recognition Agreements for industrial products and related technical dialogue”, Commission Staff Working Paper, Commission of the European Communities, Brussels, 25 August 2004 SEC(2004)1072. 56  “The New Transatlantic Marketplace”, Communication of Sir Leon Brittan, Mr. Bangemann and Mr. Monti, Delegation of the European Commission to the United States, Washington, 11 March 1998. 52

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vehicles, pharmaceuticals, medical equipment, foodstuffs and chemicals.57 In December 1998, the US and the EU agreed in principle to complete a set of MRAs within a month and planned to conclude MRAs in respect to telecommunications terminal equipment and information technology equipment; pharmaceutical good manufacturing practices; medical devices; electromagnetic compatibility; electrical safety; recreational craft; and veterinary biologics. Despite the hopes for MRAs, they only resulted in a fifth of the export flows at the time, which was below that which business and political leaders had expected.58

Regulatory Equivalence Regulatory equivalence is a form of mutual recognition but the difference is that mutual recognition provides for comprehensive recognition of a regulatory standard in respect to a particular good or service. However, regulatory equivalence requires an assessment process, in which one county makes a decision as to whether the regulatory process in the originating country meets set regulatory standards. Regulatory equivalence is often seen as a viable way forward in areas where certification and testing procedures are not involved. The first equivalence decision in the transatlantic context was in 1998 with the US-EU Veterinary Equivalency Agreement. The decision provided a form of mutual recognition involving US and EU safety and sanitation standards for animal products. The US pushed for greater financial services convergence at the first FMRD meeting in March 2002 and it was an issue both the US and EU pursued.59 On a trip to the US to allay concerns about the EU’s overhaul of financial services, Alexander Schaub, the Director-General of the Commission’s DG Internal Market, told US legislators that their country’s access to the EU market would be maintained. Speaking before US Congress in May 2003 he said “regulatory equivalence” meant a change in practice on the part of regulators and market supervisors on both sides of the Atlantic.60 “Before compelling service providers or businesses to comply with the full set of local rules—including ones which may even contradict those which they are asked to meet in their home jurisdiction—regulators and supervisors should follow a rule of reason approach”, he said.

 Communication from the Commission: Community External Trade Policy in the Field of Standards and Conformity Assessment, Commission of the European Communities, Brussels, 13 November 1996. 58  Correia de Brito, A., C. Kauffmann and J. Pelkmans. 2016. “The contribution of mutual recognition to international regulatory co-operation”, OECD Regulatory Policy Working Papers, No. 2, OECD Publishing, Paris. 59  Schaub, Alexander. 2004. “Testimony of Alexander Schaub, Director-General, DG Internal Market of the European Commission before the Committee on Financial Services”, Committee on Financial Services, US House of Representatives, Washington DC, May 13. 60  Ibid. 57

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In the EU, the first equivalence approach in the area of financial services was in 2003 with the EU Prospectus Directive (Directive 2003/71/EC) relating to prospectuses to be published when securities are issued. This was followed by the Transparency Directive (Directive 2004/109/EC) and then the Statutory Audit Directive (Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts). Several regulatory decisions have been made since in respect to foreign regulatory arrangements in a wide range of countries, including the US, as they apply to particular EU legislation. In some cases, the decisions do not fully apply to the US, that is, US regulatory arrangements in respect to particular aspects of EU legislation have not yet been made (Table 5.3).

Table 5.3  Financial-Related EU Regulatory Equivalence Decisions Year Short name 2003 EU Prospectus Directive 2004 Transparency Directivea 2006 Statutory Audit Directive 2009 Solvency II Directiveb 2009 2011 2012 2013 2014 2014

2014 2016

Legislation Directive 2003/71/EC on the prospectus to be published when securities are issued Directive 2004/109/EC

Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance Credit Agencies Regulation (EC) n° 1060/2009 on credit rating agencies, as Regulation amended by Regulation (EU) n° 462/2013 (CRAs) MiFID 2 Directive 2014/65 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU EMIR Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories, as amended CRR Regulation Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (CRR) as amended MIFIR Regulation (EU) N° 600/2014 on markets in financial instruments Regulation (EU) No 909/2014 of the European Parliament and Central Securities of the Council of 23 July 2014 on improving securities Depositories settlement in the European Union and on central securities Regulation (CSDR) depositories, as amended Market Abuse Directive Regulation (EU) No 596/2014 on insider dealing and market (MAD) manipulation (MAR Market Abuse Regulation) Regulation (EU) 2016/1011 on indices used as benchmarks in Benchmarks Regulation financial instruments and financial contracts

Source: European Commission (“Equivalence Decisions taken by the European Commission as of 10/02/2021”, European Commission; “Financial services: Commission adopts equivalence decision for US central counterparties”, European Commission, 27 January 2021) Notes: a Only Art.23(4)[third]—Third country GAAP with IFRS of the Directive applies to the US context in respect to regulatory equivalence b Only Art.227—Chapter VI of Title I-for EU insurers in third countries: solvency rules for calculation of Capital Requirements and Own Funds applies to the US

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Harmonization A stronger form of agreement is the use of harmonization agreements on regulatory standards or regimes. These involve essentially involve “policy convergence” under which both jurisdictions (or even multiple jurisdictions) agree to use the same rules, standards or processes.61 These obviously involve respective regulatory or even legislative agreement, the latter of which is frequently particularly hard to achieve. An example of the harmonization of rules in the financial sector is the introduction within the US of Article 4-A on electronic funds transfers in the US Uniform Commercial Code. In the international context, harmonization can be achieved through states agreeing to International Conventions committing themselves to incorporate specific rules into national legislation. Examples of such conventions having implications for the international financial sector are the Geneva Conventions (Cheques and Bills of Exchange) and United Nations Sales Conventions.62 The push towards harmonization was primarily driven by the US in an effort to promote the adoption of US standards. The European Commission has generally been disinterested in harmonization as an approach, saying convergence alone was “not the solution”. Even in the early 2000s the Commission was not keen on the approach.63 Mutual recognition of equivalent approaches with the same goal should supersede separate and identical approaches to legislating, Alexander Schaub, Director-­ General of the DG Internal Market of the European Commission said in 2004.64

Development of Other Formal Regulatory Cooperation As part of political priorities at heads of state level to renew and/or consolidate the US-EU relationship, the US and the EU in the late 1990s began to use other forms of cooperation. Two of these were the creation of formal regulatory cooperation partnerships and formal regulatory dialogues. Among other various forms of cooperation, these two forms represented a sudden institutionalization of regulatory cooperation, particularly in the area of financial markets regulation (Table 5.4).

 Ahearn, Raymond J. 2009. Transatlantic Regulatory Cooperation: Background and Analysis, Congressional Research Service, August 24, 2009. 62   White, William R. “International Agreements in the Area of Banking and Finance: Accomplishments and Outstanding Issues”, Bank for International Settlements, Working paper No. 38, October 1996. 63  “Implementing Policy for External Trade in the Fields of Standards and Conformity Assessment: A Tool Box of Instruments”, Commission Staff Working Paper, Commission of the European Communities, Brussels, 28 September 2001, SEC(2001) 1570. 64  Schaub, Alexander. 2004. “Testimony of Alexander Schaub, Director-General, DG Internal Market of the European Commission before the Committee on Financial Services”, Committee on Financial Services, US House of Representatives, Washington DC, May 13. 61

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Table 5.4  Other types of International Regulatory Cooperation agreements Type of cooperation Formal regulatory cooperation partnerships

Formal Regulatory Dialogues Use of intergovernmental organizations in standards-setting Regional agreements with regulatory provisions Technical assistance International standardisation Formal requirements to consider relevant frameworks in other jurisdictions in the same field Recognition and incorporation of international standards into domestic law Soft law: principles, guidelines, codes of conduct

Example EC-US High-Level Regulatory Cooperation Forum Canada–US Regulatory Cooperation Council US-EU Financial Markets Regulatory Dialogue OECD, WTO RTAs, FTAs EU technical assistance agreements in Africa and lesser developed countries OECD model agreements Specific provisions in a treaty ISO, IEC Industry codes of conduct

Note: some of these forms have been identified by the OECD (OECD. 2013. International Regulatory Co-operation—Addressing Global Challenges, OECD Publishing, Paris) but have been modified and added to in this research

By the end of the decade, US regulators and European Commission officials had created a patchwork of agreements on a number of financial markets issues that became more complex and wide reaching than those of most regional blocs with the exception of the EU itself.

Institutionalization of Financial Regulatory Cooperation The early 2000s in framework for transatlantic regulatory cooperation had been developed further, with the Transatlantic Economic Partnership (TEP) building on the earlier TD and NTA agreements. The TEP had created a pattern of regular meetings which involved reviews of regulatory differences, jointly defined government principles/guidelines for cooperation and discussion on interagency regulatory procedures.65 It was in this context that the FMRD was established in March 2002. The first US-EU regulatory forum specifically dedicated to discussing financial markets regulatory reform, its creation addressed two broad issues: it was forum through which US regulators could identify EU proposals, notably under the EU’s extensive Financial Services Action Plan (FSAP), that might pose problems for US financial institutions in advance and provide a mechanism by which to influence and shape 65

 “Transatlantic Economic Partnership”. 1998. European Commission.

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proposed legislation, as well as also work with European regulators to address challenges posed by US legislative changes.66 The FMRD was comprised of key regulators in the US and the EU, with representatives from the European Commission’s Director-General for internal markets (DG MARKT) and the US Treasury officially co-chairing the forum.67 The US Treasury was responsible for leading much of the dialogue with Commission officials and EU agencies. On the US side, representatives from the SEC, Commodity Futures Trading Commission (CFTC) and the Federal Reserve Board also attend. Other EU regulators, such as various EU financial supervisory committees, have attended on occasions.68

SEC Outreach Strategy From the US perspective, the FMRD fulfilled two broad purposes. First, it was a way to identify SEC proposals that conflicted with foreign laws and foreign stock exchange requirements and cooperate with trading partners to create a regulatory environment conducive for US firms. The SEC also established other dialogues with foreign counterparts in Asia and Latin America, similarly, to secure the interests of US business abroad. As such, the US regarded the FMRD as part of the SEC’s international outreach program; just one forum in which its Office of International Affairs program was involved in creating. Around about the same time, it also created similar dialogues with foreign counterparts in Asia and Latin America.69 From the EU point of view, the FMRD was an opportunity to “anticipate, identify and discuss financial regulatory issues, by continuing to review legislative and regulatory developments (including implementation and enforcement) and promote

 “The US-EU Positive Economic Agenda on Financial Markets Issues: Remarks by U.S. Assistant Secretary of the Treasury for International Affairs, Randal K.  Quarles”. 2002. The European Institute Transatlantic Seminar on Trade and Investment, Washington, DC, December 10, 2002, US Treasury Press Release. 67  Ibid. 68  Prior to 2011, there were three EU-level committees that played a role in supervising EU financial markets, namely the Committee of European Banking Supervisors, the Committee of European Securities Regulators and the Committee of European Insurance and Occupational Pensions Supervisors. These “level 3” committees as they were known were established under the Lamfalussy process of financial supervision. Named after Alexandre Lamfalussy who chaired the EU advisory committee that created it, the process was designed to coordinate regulatory harmonization throughout the EU but in line with the EU treaty principle of subsidiarity. However, this system was superseded by a new European System of Financial Supervisors that came into effect on 1 January 2011 and now comprises three regulatory agencies with greater authority, namely the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA). 69  Securities and Exchange Commission. 2002. The Office of International Affairs, Annual Report 2002, Washington DC. 66

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progress on issues of concern to each other”.70 Soon after the FMRD’s establishment, the EU Internal Market and Taxation Commissioner Frits Bolkestein, who was charged with EU- US regulatory cooperation on financial markets, looked to establish a joint work program with his US counterpart Treasury Secretary-­ Designate Snow. He outlined two priorities; firstly, to exchange information on legislative and regulatory developments so as to identify potential challenges for companies and investors “rather than having to repair their impact, ex post” and; secondly, to tackle issues that needed “immediate action to build confidence in the process, to show the markets that the dialogue really can solve problems”.71

Managing Financial Regulatory “Spillover” As a second objective, as expressed by Assistant Secretary of the Treasury for International Affairs Randal K. Quarles, the FMRD was a way to manage the “spillover” effects of regulatory action in one jurisdiction, such as the EU, to another, such as the US.72 For example, under the EU’s Financial Conglomerates Directive, adopted on 20 November 2002, US-based investment banks in Europe would be subject to supervision at the holding company level, whereas in the US they were supervised by the SEC at the broker-dealer level. This meant, as far as the US saw it, the creation of duplicate oversight, in this case by EU authorities, and this could mean higher compliance and operating costs for US companies. Such matters were at the “centre” of US interests.73 The dialogue in other words helped head off issues before they became problems. The SEC made a point of wanting to maintain and expand US market access to the European financial market in the era of the FSAP.74 “Well-managed, the FSAP offers a clear ‘win-win’ opportunity for Europe, the United States, the world economy and US financial institutions,” US Assistant Secretary of the Treasury for International Affairs Randal K. Quarles said several months later. In an effort to deal

 “EU-US Declaration Initiative to Enhance Transatlantic Economic Integration and Growth”, Council of the European Union, Brussels 20 June 2005. 71  Ibid. 72  Securities and Exchange Commission. 2002. The Office of International Affairs, Annual Report 2002, Washington DC. 73  “The U.S.-EU Positive Economic Agenda on Financial Markets Issues: Remarks by U.S. Assistant Secretary of the Treasury for International Affairs, Randal K.  Quarles”. 2002. The European Institute Transatlantic Seminar on Trade and Investment, Washington, DC, December 10, 2002, US Treasury Press Release. 74  “Informal Financial Markets Dialogue Fact Sheet: U.S.-EU Summit”. 2003. Whitehouse, 25 June 2003; “The U.S.-EU Positive Economic Agenda on Financial Markets Issues”. 2002. Remarks by U.S.  Assistant Secretary of the Treasury for International Affairs Randal K.  Quarles, The European Institute Transatlantic Seminar on Trade and Investment Washington, DC, December 10, 2002. 70

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with the expanded financial regulatory challenges in the transatlantic marketplace, the FMRD became the primary forum for regulatory discussion.75

European Interests The European Commission at the same time also saw the need to create a channel to anticipate potential regulatory conflict areas and avoid disputes; and to discuss concerns and resolve conflicts. The Europeans were concerned about the extraterritorial effects for EU businesses of the Sarbanes-Oxley Act, enacted in 2002 as a response to the Enron, Arthur Andersen and the other US financial scandals.76 The Act was a landmark overhaul of US corporate and capital market legislation and applied to all companies listed on US stock exchanges, including many of Europe’s largest companies whose shares were traded on US exchanges in the forms of American Depository Receipts (ADRs).77 The Act imposed among other things new auditing, corporate governance, internal control and financial disclosure requirements and European companies were concerned about the costs and access to the US market.78 For example it required audit committees to be independent and auditors to be registered with the new US Public Company Accounting Oversight Board.79 European companies were also concerned about requirements for EU companies that wanted to deregister from US exchanges, and the need for convergence of the different US and international accounting standards. The European Commission saw the FMRD as having two functions: to create an informal channel to anticipate potential regulatory conflict areas and avoid disputes; and to discuss concerns and resolve conflicts. It sought to mitigate what it saw as “unwarranted effects” of such legislation and identified seven categories of issues to be resolved, namely: registration of EU audit firms, US access to EU audit working papers, auditor independence, audit committee requirements, loans to directors, certification of financial reports and certification of internal controls.80

 Author interview with US Treasury representative, Brussels, 14 February 2014.  Securities and Exchange Commission. 2002. The Office of International Affairs, Annual Report 2002, Washington DC. 77  ADRs are “mirror” stocks that are often underwritten by US banks and effectively allow US investors to buy and trade shares in foreign companies on US stock exchanges. 78  Nick Edser. 2002. “Fraud Law Set to Hit UK Firms”, BBC News, 15 August 2002, viewed 12 August 2014. 79  Hellwig, Hans-Jurgen. 2012. “The Transatlantic Financial Markets Regulatory Dialogue”, in Hopt, Klaus J.; Wymeersch, Eddy; Kanda, Hideki; Baum, Harald, Corporate Governance in Context: Corporations, States, and Markets in Europe, Japan, and the US, Oxford Scholarship Online, March. 80   European Commission. 2002. “Meeting the Barcelona Priorities and Looking Ahead: Implementation”, Seventh Report, Brussels, 3 December. 75 76

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After the first FMRD meeting in March 2002, subsequent meetings took place roughly every 4–6 months, with participants discussing ongoing matters of concern as the EU legislative program proceeded.81 Just week later at the US-EU Summit early in May, both sides agreed on an agenda for the dialogue, thus placing the FMRD under political oversight. Another initiative to come from the 2005 EU-US Summit was an informal dialogue between the European Commission Secretariat General and the US Office of Management and Budget, part of the US Treasury, regulatory policy and practices generally, with issues such as good practice, the use of transparency provisions, public consultation processes, impact assessment, and risk assessment methodologies.

The High-Level Regulatory Cooperation Forum In the mid-2000s, the US and the EU felt that the ongoing dialogue should encompass other levels of government and industry and fall within a broader political priorities framework. Plans were formulated to create such a body to be launched at the 2005 EU-US Summit. Announced after the summit, the High-level Regulatory Cooperation Forum comprised senior US government and European Commission officials across issue-area in an effort to exchange views on how to regulate and how to cooperate on regulatory issues. The dialogue helped, as the US viewed it, bridge gaps where responsibilities in the two administrations did not correspond exactly. The forum was a way to coordinate and prioritize issues. This was particularly important for issues such as risk assessment, cost-benefit analysis and impact analysis when promulgating regulations across all sectors. A broader forum was welcomed by the EU as well give that the various Directorates-Generals at the Commission had their own arrangements with US counterparts in their particular policy sectors. The forum’s creation meant the FMRD was placed into a setting where political priorities and industry perspectives could more easily be incorporated into the FMRD agenda.82 Some of the sessions have been public and involved a range of other stakeholders, whereas the FMRD meetings have been private, involving just regulators. The FMRD subsequently became the focal point of US-EU regulatory negotiation. By July 2003, of the 42 original measures in the FSAP, 36 had been finalised and three were still under negotiation, with three proposals still to be made.83 The work program included a range of issues including regulation of credit ratings  Schaub, Alexander. 2004. “Testimony of Alexander Schaub, Director-General, DG Internal Market of the European Commission before the Committee on Financial Services”, Committee on Financial Services, US House of Representatives, Washington DC, May 13. 82   Author interview with DG MARKT representative, European Commission, Brussels, 14 June 2014. 83  HM Treasury, the Financial Services Authority and the Bank of England. 2003. “The EU Financial Services Action Plan: A Guide”, London, 31 July. 81

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a­ gencies, convergence of accounting standards, insurance solvency rules, derivatives regulation and alternative investment fund managers.84

A Strategy of Mutual Engagement The FMRD has been the focal point of US-EU regulatory negotiation since the early 2000s and has been considerably successful in creating mutually beneficial outcomes. Some of the earlier meetings were criticised as having achieved very little. For example, a December 2005 meeting agreed only to monitor concerns around regulation affecting hedge funds and the conduct of credit rating agencies. Similarly, successive meetings pledged to push towards the convergence of accounting standards but this was an issue that has not progressed significantly. Nevertheless, it has become also a channel by which both the US and EU can influence and shape policy outcomes in each other’s respective jurisdictions. Some scholars have argued that the FMRD has been part of a deliberate strategy by US agencies, including the SEC, to lead in the international regulatory space at a time of rapid change.85 This has been true in many respects; it has established a channel by which the US could play a role in constructing EU policy as part of the broader bilateral goal of promoting trans-Atlantic economic integration. For example concerns over the proposed Markets in Financial Instruments Directive led to an extension of the EU’s implementation deadline to January 2007 for US companies.86 The directive, which was finalised in 2004, created detailed rules throughout the EU that affected the whole securities trading cycle and covered hedge fund managers, asset fund managers, retail investors, investment advisers and stock exchanges themselves. However, it has also allowed EU officials to shape US outcomes. The SEC has made considerable efforts to accommodate EU firms.87 The FMRD was also primarily created as a forum to air views, exchange background and technical information and identify problem areas and played a critical role in the overall negotiation process.88 In this respect it has succeeded.

 European Commission, DG Internal Market, “Third Countries Dialogues Update: Note to the Financial Services Committee”, Brussels, 11 November 2009. 85  See Pollack, Mark A. 2005. “The New Transatlantic Agenda at Ten: Reflections on an Experiment in International Governance”, Journal of Common Market Studies, 43, Issue 5; Posner, Elliot. 2005. “Market Power without a Single Market: The New Transatlantic Relations in Financial Services”, in Andrews et al. (eds) The Future of Transatlantic Relations: Continuity Amid Discord, EUI, Florence. 86  Moloney, Niamh. 2006. III, Financial Market Regulation in the Post-Financial Services Action Plan era, International and Comparative Law Quarterly, 55, No. 4. 87  European Commission. 2003. “Financial Services Nine Months Left to Deliver the FSAP”, Eighth Report, Brussels, 3 June. 88  Author interview with US Treasury representative, Brussels, 14 February 2014. 84

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Intensified Regulatory Cooperation During the GFC Throughout 2002–2008, FMRD meetings took place every six months or so, however, the global financial crisis triggered an intensification of financial markets regulatory cooperation at regulator level. Such intensification highlights the degree to which regulatory dialogue is subject to political and economic issues of the day. In this respect it is a mechanism that very much reflects respective US and EU political priorities. While regulators have a certain degree of independence in creating and working to their own agenda, they are also subject to the greater domestic preferences, which they ultimately represent. One of the best examples of this in recent decades has been the intensification of cooperation during the global financial crisis in many policy areas of financial markets regulation. After the G20 Summit meeting in Washington in November 2008, the G20 agreed on a wide agenda for regulatory reform. Four months later, the subsequent G20 London Summit in April expanded the number and scope of issues even further, which were discussed in the context of the US-EU bilateral regulatory dialogue.89 Efforts to coordinate the development of US and EU legislation, rules and technical standards particularly, picked up pace in mid 2009, with a further legislative work agenda arising from the Pittsburgh G20 Summit from 24 to 25 September 2009.90 Negotiations primarily took place guided by the US Treasury and DG MARKT. It was a period of cooperation described by a US Treasury representative as “extremely deep”.91 It was also a period in which cooperation took place not only in the context of the FMRD discussions, but also informal phone calls, and high-level regulator meetings (at heads of Commission at the European Commission level and senior US Treasury officials). There were three meetings of the FMRD between the end 2008 and the end of 2009. An extensive program of discussion took place on issues of market supervision, plans for banks capital stress tests, exchanges of views on US and EU respective proposals to reform financial markets supervision, issues of addressing systemic risk. Both sides agreed in principle to coordinatee reforms to rules on capital, liquidity management, leverage and risk management in the aegis of the BCBS. Technical experts on both sides exchanged views on stress testing. There were also discussions about credit rating agencies reform, the need to share information on OTC derivative contracts, and promote a global infrastructure for payments and settlements. They agreed in principle to enhance supervision of hedge funds and alternative investment fund managers and proposed a roadmap for the  potential use of

 Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 90  Ibid. 91  Author interview with US Treasury representative, Brussels, 14 February 2014. 89

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International Financial Reporting Standards (IFRS) by US issuers. Issues around auditing and insurance were also discussed.92

“A Constant Dialogue at Working Level” In addition, FMRD participants had numerous additional informal meetings, calls and exchanges on financial regulatory issues. By the end of 2009, from the EU’s perspective, the FMRD had become the “forum of choice” for dialogue.93 The dialogue was also characterized by vigorous communication, formal and informal, via email and phone between a range of US regulatory agencies and the European Commission. According to one high-level official with US Treasury directly involved in US-EU negotiations on various legislative proposals in the several years following the worst of the financial crisis, “not a week went by without officials from regulators talking to each other”, with US and EU officials engaged in “a constant dialogue at working level”.94 There was a “shared understanding on the need to avoid disruptions in the market that are extremely costly”.95 There were also several high-level meetings with the visits to the US in December 2008 and June 2009 of Commissioner McCreevy, who succeeded Frits Bolkestein as Commissioner, and the visits of DG Jorgen Holmquist to the US in April and September 2009.96 Industry also played an integral role in policy negotiations. For example, during the US-EU High-Level Regulatory Cooperation Forum’s first meeting on 15 October 2008 in Washington DC, a day-long forum was divided into two sessions; the first session was a closed government-to government meeting between senior officials from the European Commission and representative of US regulatory agencies. The second session included a public panel discussion with stakeholder representatives hosted by the US Chamber of Commerce. Meetings with the Trans-Atlantic Business Dialogue (TABD), a regular forum that brings together company executives and high-level government officials on both sides of the Atlantic, also increased in frequency. In some cases, industry’s views resulted in significant concessions on the part of regulators. For example, the SEC acknowledged that based on comments received from industry during a consultation process in late 2008 and early 2009 about reform of credit ratings agencies “significant revisions” had been made to its proposals.97 This issue is discussed in further detail in the subsequent chapter.  “Note to the Financial Services Committee: Third Countries dialogues update”, DG Internal Markets and Services, European Commission, Brussels, 11 November 2009. 93  European Commission. 2009. “European Financial Integration Report”, Brussels. 94  Author interview with US Treasury representative, Brussels, 14 February 2014. 95  Ibid. 96  European Commission. 2009. “European Financial Integration Report”, BrusselS. 97  Chung, Joanna and Duyn, Aline Van. 2009. “US Rating Agencies Escape Overhaul”, Financial Times, 22 July. 92

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Financial Stability Issues and the ECB In terms of the FMRD, the field of issues canvassed dealt only with financial markets regulation. In late 2008, as the financial crisis began to affect sovereign balance sheets, EU member states Latvia, Romania and Hungary began to experience acute balance of payments difficulties. G20 members at the summit in London in April had agreed to commit further funds to the IMF, which was prepared to extend assistance. However, none of these issues fell under the purview of the US Treasury in Brussels.98 These were issues of financial stability and not within the scope of the financial markets regulatory arrangements. Issues to do with financial stability were dealt with by officials at the Federal Reserve and the Directorate-General for Economic and Financial Affairs at the European Commission. In addition, the ECB became a critical contact for the US during the crisis of 2008–2009 and subsequent years through the Euro Crisis in 2009–2010. Just over a year after the G20 Leaders’ Summit in Washington in November 2008, the Lisbon Treaty came into effect in the EU and the institutional dynamics changed. The treaty, coming into force on 1 December 2009, it expanded the ECB’s role over supervision.99 The bank’s role also became more critical to responding to the crisis as liquidity in the EU’s financial markets froze amid market panic and deteriorating business and consumer confidence levels. Acting in concert with other central banks around the world, the ECB started to pour billions of euros into the EU financial system through various mechanisms in an effort to provide much-­ needed liquidity.100 The instability of the banking system in Europe had significant implications for not only US banks operating in the US, but also US firms in Europe. Later it started to extend its support to Eurozone banks through its Long-Term Refinancing Operations (LTROs)—a process in which it effectively lent money to Eurozone banks. These “non-standard operations”, as the ECB describes them, became crucial as some banks teetered on the edge of insolvency.101 After the IMF, the ECB President (first Jean-Claude Trichet, then Mario Draghi) became the US Treasury’s most important contact. After in the global financial crisis in 2008–2009, an analysis by Brussels economic think tank Bruegel of phone calls and meetings held by US Treasury Secretary Timothy Geithner between January 2010 and June 2012—a period that included the bailouts of Eurozone members Greece, Ireland and Portugal—found that the ECB was Geithner’s main point of contact102. The ECB later gained a greater role in overseeing financial stability in

 Author interview with US Treasury representative, Brussels, 14 February 2014.  Ibid. 100  Federal Reserve. 2008. “Minutes of the Federal Open Market Committee”, 28–29 October. 101  Mersch, Yves, Member of the Executive Board of the ECB. 2013. “The European Central Bank’s Role in Overcoming the Crisis”, speech to UniCredit Business Dialogue, Hamburg, 17 June. 102  Pisani-Ferry, Jean. 2012. “Tim Geithner and Europe’s Phone Number”, Bruegel, Brussels, 4 November. 98 99

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the Eurozone through its newfound role in the European Systemic Risk Board (ESRB). Later on, under legislation that entered into force in 2010, the bank was tasked with macro-prudential oversight of the Eurozone financial system as a whole. With a Secretariat in Frankfurt am Main in Germany, not too far from the headquarters of the ECB, management of the ESRB was given to the ECB.

Conclusion As transatlantic regulatory cooperation in the financial services sector emerged and developed in the 1990s, a greater need arose on the part of the US and the EU to resolve disputes and improve interoperability of differing transatlantic standards. A particular form of cooperation emerged with distinct preferences for information exchange, MRAs and regulatory equivalence regimes among them. The institutionalization of financial markets regulatory cooperation in 2002 with the creation of the FMRD and later the High-level Regulatory Cooperation Forum, came as part of the SEC’s international outreach program and efforts to better create a permanent form for discussion, negotiation and as a basis for policy coordination. However, it was also a mechanism by which the EU could negotiate concessions on newly introduced US legislation. The global financial crisis represents a particularly interesting case study in respect to the operation of US-EU cooperation on financial regulation. The transatlantic relationship entered a period of particularly intense cooperation in respect to numerous financial markets issue-area during, consolidating what was an “extremely deep”103 and unprecedented level of cooperation between US and EU regulators involving “shared understandings” as discussed above.104 Rather than replacing intergovernmental negotiations, regulators effectively worked alongside heads of state in implementing reforms discusses in fora like the G20. In this respect, the agenda was very much reflective of their respective political and economic preferences. To illustrate the issues of concern, modes and outcome of transgovernmental cooperation on financial markets areas, the following chapter provides several case studies on three issue-area of financial markets cooperation during the financial crisis.

103 104

 Author interview with US Treasury representative, Brussels, 14 February 2014.  Ibid.

Chapter 6

Case Studies in Multilevel US-EU Policy Coordination: Credit Ratings Agencies, Accounting Standards and Credit Default Swaps Reform

Three issue-areas of financial regulatory reform highlight the political processes involved in the policy cooperation between the US and the EU at intergovernmental level. At the outset of the more severe stage of global financial crisis in 2008–09, the US and the EU sought to provide a quick and comprehensive solution to the escalating financial crisis that had enveloped the transatlantic financial markets and affected world markets. Only one of these areas, accounting standards, had been on the reform agenda of US-EU regulators for some time, with credit ratings agencies and credit default swaps issues raised in the midst of the crisis. Acting in concert, the US and the EU, which together represented the world’s two largest economies, sought coordinate a response to the global financial crisis in international fora, including the G7 and the G20. At the same time, regulators intensified cooperation on more technical issues, dealing with industry actors and policy negotiations. This chapter discusses in-depth how, despite common preferences on some matters, key differences between US and EU regulators posed significant challenges to create converged positions for regulation. The three case studies in this chapter aim to highlight US and EU preferences, modes of cooperation, key challenges, and negotiated outcomes.

CASE STUDY 1: Credit Ratings Agencies Reform Coordinating US and EU regulatory regimes in respect to credit ratings agencies had been discussed between the US and the EU in the years preceding the financial crisis, but its priority took on heightened importance in mid 2007. It was revealed that many of the financial products to which credit ratings agencies had given their top ratings were responsible for much of the havoc inflicted on the banking system.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_6

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The now infamous CDOs, for example, had been given the top AAA ratings by all three leading agencies and sold widely to funds, banks, investment vehicles, insurers and investors around the world. Much of the collateral in these structured investments were subprime and simply evaporated when property markets went sour in the US and Europe. These supposed top-quality instruments were suddenly responsible for huge banking and financial industry losses, calling into serious question the scrutiny credit ratings agencies had applied to them. The US Financial Crisis Inquiry Commission later found the failures of credit ratings agencies to properly scrutinise these investments were “essential cogs in the wheel of financial destruction” and that the three leading US-based agencies — Moody’s, Standard & Poor’s and Fitch — were “key enablers of the financial meltdown”.1 In the years leading up to the crisis, credit ratings agencies had been largely unregulated. In the US, the SEC was able to “recognize” agencies but, to address concerns about their role in the growing subprime mortgage problems, the Credit Rating Agency Reform Act of 2006 gave the SEC the ability to register Nationally Recognized Statistical Rating Organizations (or NRSROs) and require them to provide regulators with certain information.2 This included information relating to procedures and methodologies, policies or procedures to prevent misuse, organizational structure, whether they had an internal code of ethics (but no requirement to have one) and any conflicts of interest. The Act gave the SEC the authority to sanction agencies, but there was no requirement to actually avoid conflicts of interest (for instance when the agency takes consulting fees from the same institution it issues ratings on), no need to differentiate between complex products with hidden risks, such as structured finance products, and no requirement to disclose to the public the procedures or methodologies the agencies employed to rate a company or asset or country. In Europe, prior to the financial crisis, most member states did not have specific legislation that regulated the activities of credit ratings agencies or the conditions around issuing credit ratings. Agencies were subject to EU law only in limited areas, including a directive on insider dealing and market manipulation, a directive broadly relating to credit institutions and a directive on the capital adequacy of investment firms and credit institutions.3 In member states or at EU level credit rating agencies were not subject to any special registration process (as all the major international 1  Financial Crisis Inquiry Commission. 2011. “The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States”, Washington DC, January. 2  The Credit Rating Agency Reform Act of 2006 entered into force on 27 June 2007. 3  Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on Credit Rating Agencies, OJ L302/1; See also Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on Insider Dealing and Market Manipulation OJ L 96/16; Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) OJ L 177; and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) OJ L 177.

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agencies were US-based) but they were expected (but not required) to adhere to an international code of conduct for credit ratings agencies established in 2004 by the Madrid-based International Organization of Securities Commissions (IOSCO).

Reforms in Progress Prior to GFC It was not until June 2008 that, responding to greater concerns around methodologies, disclosure, procedures and conflicts of interest among agencies and amid even greater market turmoil, the SEC proposed further amendments to the existing rules. It proposed a range of measures around public disclosure of information on rated products and methodologies, addressing conflicts of interest and the so-called practice of buying ratings and reporting, among other measures.4 However its proposals were subject to an industry consultation process and many measures were watered down or failed to materialize. A global industry association that develops rules relating to securities and futures markets for its members from more than 100 different countries, the IOSCO CRA Code of Conduct Fundamentals was introduced in 2004 in the wake of the Enron and WorldCom corporate scandals in the US. It was non-binding and spelled out principles around issues such as conflicts of interest and disclosure.5 At the time IOSCO noted that the code was “not intended to be rigid or formulistic” but was “designed to be a set of measures that should be included in some form or fashion in the codes of conduct of individual CRAs”.6 As such, credit ratings agencies were able to introduce codes of conduct as they saw fit. The code established a framework for self-regulation and most credit ratings agencies, including the three leading US-based agencies, implemented it, but there was no European requirement for the code to be adhered to, nor any meaningful oversight by a regulatory or financial authority. It was this regime that operated up until the financial crisis.

A US-EU Divergence Prior to the G20 Leaders’ Summit in Washington there was a groundswell of criticism about the ratings agencies’ operations. In Europe, the European Parliament’s Committee on Monetary Affairs called on the Commission in April 2008 to establish its own EU public ratings agency and formulate rules for existing agencies to 4  Securities and Exchange Commission. 2008. “SEC Proposes Comprehensive Reforms to Bring Increased Transparency to Credit Rating Process”, press release, SEC, 11 June. 5  IOSCOs Code of Fundamentals for Credit Rating Agencies of December 2004 set out principles around quality, monitoring, updating, integrity, analyst independence and transparency but it is not binding. The code was revised in May 2008 and remains non-binding. 6  “Code of Conduct Fundamentals for Credit Rating Agencies”, IOSCO, October 2004

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tackle “the conflicts of interest” inherent in their current business models.7 Such criticisms centred around three main concerns: the agencies were paid by the issuers of the securities they rated rather than by the investors who used the ratings; their ratings were formed mostly using information provided by issuers of the securities they were rating; and they advised issuers how to structure their products to achieve the best ratings and then rated those same securities.8 In a speech in June 2008 Internal Markets Commissioner McCreevy, a former Irish politician, attacked the IOSCO code as a “toothless wonder” saying he was “deeply sceptical” about its usefulness.9 The next month the Commission proposed far-reaching draft legislation, making it clear in its consultation document that it viewed the existing IOSCO code of conduct as inadequate and that it needed to be “significantly reinforced”.10 The Commission proposed a couple of options for supervisory oversight of credit ratings agencies, one of which was establishing a dedicated EU-level authority and the other was leaving supervision to member states, but both of which would involve a specific registration process for credit ratings agencies that wanted to operate in the EU. The proposal also outlined other stringent requirements, including banning credit ratings agencies from carrying out consultancy or advisory services relating to the design of structured finance instruments (which they had previously), measures to prevent conflicts of interest within agencies (which had been a problem), extra requirements for disclosure (which had been a problem) and provisions linking remuneration to experience and skill. It also suggested more “business invasive” measures like a process for credit ratings agencies to periodically review their methodologies independent of their business and even outlining some circumstances in which a CRA would have to withhold from issuing a rating or withdraw an existing credit rating.11

Concerns over EU Proposals There was considerable criticism from the markets in the US and Europe, notably the UK, at the time. There were concerns among ratings agencies themselves that because ratings were pan-jurisdictional they would need to apply the EU’s rules to 7  European Parliament Committee on Economic and Monetary Affairs. 2008. “Draft Report with Recommendations to the Commission on Hedge Funds and Private Equity”, Strasbourg, 18 April (2007/2238(INI)). 8  Helleiner, Eric and Pagliari, Stefano. 2009. “Towards a New Bretton Woods? The First G20 Leaders’ Summit and the Regulation of Global Finance”, New Political Economy, 14, No. 2, June. 9  McCreevy, Charlie, European Commissioner for Internal Market and Services. 2008. “Regulating in a Global Market”, speech at Inaugural Global Financial Services Centre Conference, Dublin, 16 June. 10  European Commission. 2008. “Consultation by the Commission Services on Credit Rating Agencies (credit ratings agencies)”, press release, 31 July. 11  European Commission. 2008. “DG MARKT Services Document”, proposal for a Regulatory Framework for credit ratings agencies, Brussels, 31 July 2008.

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all ratings worldwide.12 There were also complaints about the cost and implementation timetables but it was also clear there would be some fundamental problems. One was that banks might find themselves unable to use the ratings issued by US-based agencies, as those ratings would not satisfy regulatory requirements. In fact ratings are used by government itself and even entrenched in legislation. The Basel III liquidity rules for banks for example provide for favourable treatment to bonds from countries with triple-A or double-A ratings, while central banks frequently depend on the ratings to make their own monetary policy decisions. Even in the time of crisis, ratings can play a role in government action, with the ECB during the Eurozone crisis at one stage and basing its decisions on whether to accept Greek collateral for its liquidity (bond-buying) program on ratings downgrades by the major ratings agencies.13 The US Government also had concerns about the EU proposals. At an FMRD meeting in October 2008, just weeks after the collapse of Lehman Brothers in the US and amid major market turmoil, US authorities expressed the concerns about the impact of US-based ratings agencies being required to register in the EU, future barriers to market entry, as well as recognizing the need for greater oversight.14 The SEC was facing considerable pressure itself. The SEC over the last several months had accepted 61 submissions to its own proposed reforms, mostly against, mainly from the banking and capital markets industries and ratings agencies themselves, many of whom were concerned about the cost of tighter regulation and practical matters. Another common theme was that the changes would unsettle the already fragile capital markets. The EU’s response was to assure the US that it would grant regulatory “equivalence” to the US regulatory framework soon, although specific timeframes were not established. Despite proposals from the main ratings agencies to reform their practices and establish an alternative to regulation (such as a Standards and Poor’s proposal to establish an ombudsman for stakeholders and hold a public annual review of governance processes), the EU pushed on with its legislation. Internal Markets Commissioner McCreevy was under criticism for failing to take a tougher stance on financial services regulation earlier.15 There was also political pressure in France and Germany particularly to introduce tough new rules. In the lead-up to the G20 Summit in Washington on 14–15 November French President Nicolas Sarkozy attacked the ratings agencies as totally unsupervised as well as “the excesses of a financial capitalism” and urged a complete overhaul of the

 Standard & Poor’s. 2008. “Proposal for a Regulatory Framework for credit ratings agencies and Embedded Ratings Policy Options”, submission to European Commission, Brussels, 5 September. 13  Milne, Richard. 2011. “Credit Rating Agencies Place ECB in a Bind”, FT.com, 5 July. 14  European Commission, DG Internal Market, “Third Countries Dialogues Update: Note to the Financial Services Committee”, Brussels, 11 November 2009. 15  Castle, Stephen. 2008. “Europe Moves to Tighten Control of Rating Agencies”, The New York Times, 29 October. 12

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financial system.16 The next month, on 12 November 2008, just days before the G20 Leader Summit in Washington, the Commission revealed its draft Regulation, arguing that the existing international IOSCO code of conduct did not “offer an adequate, reliable solution”.17 It also placated US concerns promising to “level the playing field between the EU and the US by setting up a regulatory framework in the EU comparable to that applied in the US”.

The US Positions Itself at the G20 In the lead up to the summit there were significant differences between the US and EU preferences on the approaches to reform. Sarkozy and Barroso pushed for tougher regulation but President Bush took a more cautious market-centred position, arguing that regulation was best left to industry. The outcome of the summit for the Europeans was a distinct defeat of their tough preference in respect to ratings agencies, at least in respect to achieving a harmonized transatlantic approach. In disregard of the Commission’s well-publicised preference for regulation, the G20 opted for the US preference and affirmed its commitment to work within the existing “strengthened international code of conduct”, that is the IOSCO code of conduct.18 The G20 nevertheless pledged to take steps to “review” credit rating agencies oversight specifically in the areas of conflicts of interest, market disclosure, and the differentiation of ratings for complex products. The EU’s preference to heavily regulate ratings agencies with a legislated registration process had lost out to the US preference for industry regulation, although the G20 arguably weak pledge to “take steps” left considerable scope for national regulators to act in manners they each saw appropriate. The next month the divergent US and EU proposals were discussed among other issues (notably insurance rules) at the FMRD in a videoconference that involved representatives of the Commission, the US Treasury, Federal Reserve and the SEC among other parties where the US discussed its intended rules to EU officials.19 US (and EU) insurers at the December 2008 meeting were concerned about the use of ratings and the timeframe for implementation. The SEC revealed meanwhile on 3 December that it planned to amend its existing rules that would require separation of consulting from rating activities and prevent agencies from accepting gifts over US$25 from the companies whose debt they rate. Its proposal overlooked several issues, including the issue of differentiation of ratings for complex products (as  Sarkozy, Nicolas, President of the French Republic. 2008. speech at the opening of the Sixteenth Ambassador’s Conference, 27 August. 17  European Commission. 2008. “Proposal for a Regulation of the European Parliament and of the Council on Credit Rating Agencies”, COM(2008) 704 final, Brussels, 12 November. 18  G20. 2008. “Declaration of the Summit on Financial Markets and the World Economy”, Washington DC, 15 November. 19  National Association of Insurance Commissioners. 2008. “Year-End Review: Highlights of NAIC Regulatory Cooperation Efforts”, Washington DC, September/December. 16

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explicitly stated by the G20).20 The changes were seen in the US by some media as light-touch and the final document less stringent than its original proposal earlier in June 2008.21 Even the SEC noted its final proposal included “significant revisions based on the comments received” from industry and other submissions. In the rules that came into effect two months later in February 2009, ratings agencies’ business models and practices remained largely intact.22 The EU pushed ahead with its tougher regime amid concerns from industry. In the lead up to the G20 Leaders’ Summit in London in April, some European leaders, notably France’s Nicolas Sarkozy, continued the call for tougher overall regulatory reform, including in respect to credit ratings agencies. The outcome of the summit was actually a compromise between the US and EU preferences. The G20 felt that all agencies whose ratings would be used for regulatory purposes should be subject to a regulatory oversight regime, including registration.23 The US already had this and the EU had proposed to do, but the G20 position reflected the US preference to maintain the role of IOSCO in policing its industry code of practice and mandated that IOSCO should coordinate full compliance between countries. Even so, national authorities could enforce compliance too and were given scope to require their own changes to a rating agency’s practices and procedures for managing conflicts of interest along other matters. The G20 also referred the matter of ratings relating to bank prudential regulation to the Basel Committee on Banking Supervision, effectively leaving the issue in the hands of technical experts and national regulators, as opposed to legislation.

EU Credit Ratings Legislation Days after the London G20 Summit, new EU legislation was signed off after passing the European Parliament and the Council. It took the form of a Regulation, a legislative form in the EU that has immediate effect throughout the EU, with the new requirements coming into force on 7 December 2009. Noting that agencies were “considered to have failed” to reflect the worsening market conditions and to adjust their credit ratings in time, the legislation required ratings agencies to register with the Committee of European Securities Regulators (CESR),24 although they

 See Federal Register, 74, No. 25, February 9, 2009, Rules and Regulations.  “Reforming the Ratings Agencies: Will the US Follow Europe’s Tougher Rules?”, Knowledge@ Wharton newsletter, Wharton Business School, May 27, 2009. 22  Chung, Joanna and Van Duyn, Aline. 2009. “US Rating Agencies Escape Overhaul”, Financial Times, 22 July. 23  G20. 2009. “Declaration on Strengthening the Financial System (Annex to London Summit Communiqué)”, London, 2 April. 24  Established in 2001, the Committee of European Securities Regulators was a committee comprising European Securities regulators established by the European Commission. It was replaced by the creation of the new EU-level European Securities and Markets Authority (ESMA) in 2011, one of three new EU-level regulators established under the European System of Financial Supervision. 20 21

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would be directly subject to regulation by competent member state authorities. New ratings agencies wanting to operate in the EU would have to apply for registration by 7 June 2010 and existing credit rating agencies would have to apply by 7 September 2010. All credit rating agencies operating in the EU would be subject to a range of new rules. They could not provide advisory services; must disclose the models, methodologies and key assumptions used; must differentiate the ratings of complex products; must publish an annual transparency report; have at least two directors on their boards whose salary does not depend on the ratings agency’s business performance; and should create an internal function to review the quality of their ratings.25 The legislation also established a regulatory equivalence regime. EU-based credit ratings agencies could use ratings issued outside the EU providing they were subject to legislative requirements at least “as stringent as” those applicable in the EU. They should also be supervised by an agency with which the European Securities and Markets Authority (ESMA), which would soon replace the CESR, had a formal cooperation arrangement. However, while the legislation implemented many of the original requirements in the Commission’s earlier draft, there were some significant concessions that alleviated pressure on US industry as well as US regulators. Under the new rules, banks, other financial institutions and insurers could only use credit ratings for regulatory purposes if they were issued by EU-based credit rating agencies but, as a result of their concerns, they were given an extra year and would only be subject to the requirements by 7 December 2010. As a result they could use non-EU issued ratings until then. In addition issuers of a company prospectus would not be required to disclose whether credit ratings mentioned in the prospectus were issued by a ratings agency in the EU until this date as well. This followed concerns by US companies that given the July 2009 deadline for agencies to register, six months was not enough time to make preparations in a company prospectus. Additionally, credit ratings agencies were given breathing space until June 2011 to ensure non-EU credit ratings agencies were registered and subject to supervision and independent in their own country before endorsing a non-EU credit rating.26 The requirement for credit ratings agencies to ensure that a formal cooperation arrangement existed with a third country’s regulatory agency before that country’s rating could be used was also extended until June 2011. This gave US and EU regulatory authorities extra time to establish formal agreements.27 These concessions effectively allowed the uninterrupted use by EU banks of ratings issued by US agencies until June 2011 but it was also a concession that gave the US more time to get its own reforms through US Congress. Credit ratings agencies would still need to register with EU regulatory authorities, however, but they would

 European Commission. 2009. “Approval of New Regulation Will Raise Standards for the Issuance of Credit Ratings Used in the Community”, press release, 23 April; Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on Credit Rating Agencies, OJ L302/1. 26  Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on Credit Rating Agencies, OJ L302/1. 27  Specifically see Article 4(3) points (f), (g) and (h) . 25

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be able to operate until US “equivalence” was granted — which the EU promised the US would be forthcoming. It gave agencies time to comply with the new tighter requirements such as prohibiting them from providing advisory services, requiring disclosure of methodologies, requiring the clear labelling of complex products with a specific symbol, and publishing an annual transparency report for example. In addition, the legislation watered down the tough position around conflicts of interest, instead merely stating that ratings agencies “should avoid” situations of conflict of interest and “manage those conflicts adequately” and disclose any conflicts of interest “in a timely manner”.28 There were particular concessions for smaller agencies with fewer than 50 staff. Ratings issued by smaller non-US agencies could be used in the EU if they were “not of systemic importance” to the EU financial system. They could be used if the non-EU agency that issued them in that third country was subject to a regulatory regime considered “equivalent” by the Commission, and cooperation agreements existed between relevant regulatory authorities.29 Alternatively they could be exempted from some of the obligations by a competent member state authority.

Regulatory Equivalence Regime One of the big problem areas was the requirement for credit ratings agencies to establish that a third country’s regulatory regime was “as stringent as” the EU regime before endorsing a credit rating from that country. It effectively placed pressure on the US to continue with its financial reforms, which at that stage were still working their way through the US legislative system. Another FMRD meeting between the US and EU took place in June 2009 with the US impressing the need for the EU to push through with its “equivalence” assessment so that US-issued credit ratings would not be locked out of the EU when most new endorsements came into force at the end of the year.30 In June 2009 the CESR to prepare technical advice for equivalence on the US regime noting that it was a “priority” to avoid disruption in the financial markets.31 With the new regulations coming into effect at the end of the year, the timetable was tight as comitology procedures32 had to be put in place in time.33 The next month in

 Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on Credit Rating Agencies, OJ L302/1. 29  Ibid. 30  European Commission, DG Internal Market, op. cit. 31  European Commission. 2009. “Letter to the CESR Chairman Eddy Wymeersch”, 12 June. 32  Comitology was the process by which proposed EU legislation was negotiated and amended in various committees in the European Commission. The process was established in EU law under the Treaty on the Functioning of the European Union and allowed representatives of member states to have input on various matters of legislative implementation. Such input was restricted by legislation, however, and has since been phased out by provisions in the Lisbon Treaty. 33  European Commission, DG Internal Market, op. cit. 28

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July 2009 Commission officials travelled to Washington to meet with SEC and US Treasury officials to discuss the equivalence procedure and timetable. The problem was that the US regime was not equivalent and the US administration’s reforms were not through Congress. While EU-based EU credit ratings agencies now had to register and could endorse non-EU credit ratings, the remaining requirements of the EU legislation — including that the US regulatory regime had to be “as stringent as” the EU system or had been considered “equivalent” by the Commission — were set to kick in at the end of 2010. In technical advice provided to the Commission in May 2010, the CESR identified myriad differences between the US and EU regimes and noted that it considered further convergence between the US and the EU could only be achieved by “future regulatory amendments to the Securities and Exchange Commission’s rules”.34 While concluding the US regime was “broadly equivalent”, there were still differences. The US system relied heavily on the ability of the market to make its own judgment about the quality of the credit ratings and of the methodologies used to determine them and gave restricted authority to the SEC to supervise them. Specifically there were concerns in the EU among regulators around the disclosure of credit ratings information, the quality of credit ratings issued and the nature of the methodologies used.35 The debate then shifted to the Commission’s interpretation of the “as stringent as” rule. After the CESR’s advice was made public there were concerns that, despite the ability of a credit rating agency to endorse third country ratings, non-EU ratings would not be acceptable when the new system came into effect in the EU because the CESR’s advice had made it clear that the US “regulatory system” was not equivalent or adequate.36

European Concern over US Plans At the same time European banks were concerned about some of the SEC’s new rules. One for example related to requirements that they should disclose certain information to other agencies. The banks argued that there might be conflicts with data protection and bank secrecy laws and conflicts with the EU’s new legislation.37 The seeming disagreements led some commentators to argue that the relationship

 Committee of European Securities Regulators. 2010. “Technical Advice to the European Commission on the Equivalence Between the US Regulatory and Supervisory Framework and the EU Regulatory Regime for Credit Rating Agencies”, Washington DC, 21 May. 35  Committee of European Securities Regulators. 2010. “Technical Advice to the European Commission on the Equivalence Between the US Regulatory and Supervisory Framework and the EU Regulatory Regime for Credit Rating Agencies”, Washington DC, 21 May. 36  Tait, Nikki. 2010. “Banks Issue Warning About Credit Rating Rules”, FT.com, 3 November. 37  European Banking Federation. 2010. “SEC rule 240 17 (g) 5 – implications for European securitisation issuers”, submission to the Securities and Exchange Commission, 12 May. 34

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had hit a low point.38 Finally, in July 2010 the US Congress passed the most sweeping legislative reform to financial markets in decades — the US Dodd–Frank Wall Street Reform and Consumer Protection Act. Unlike the EU approach to financial regulation, where individual pieces of legislation were brought forward and introduced, the US opted to introduce a single piece of legislative reform. The provisions gave the SEC greater ability to impose sanctions and even suspend agencies’ operations. Among other measures the reforms gave the SEC a mandate to establish a new Office of Credit Ratings that would conduct an annual review of each agency and publish the results. Many of its provisions reflected European concerns and were a result of the negotiations between the EU and the US over the course of the year.39 The legislation’s passage also created a clear path for the US regime to be granted the equivalence the EU had promised. After further discussion between the SEC and the CESR an updated CESR technical advice found that the requirements directly introduced (through “self-executing” provisions) in the Dodd Frank legislation, plus the statutory rules that the SEC could issue from time to time, provided a sufficient basis for the approval of equivalence of the US legal and supervisory framework for credit rating agencies.

 he European Securities and Markets Authority T Gains Responsibility The start of the New Year in 2011 saw the operation of the new EU-level supervisory agencies to oversee the financial markets throughout the EU. These new agencies on 1 January replaced the previous EU-level CESR committee-based structure and, under a new EU-wide supervisory framework, were given new albeit limited authority.40 This included the ability to draft technical standards that could be used in EU legislation, issue binding decisions on certain matters, and launch inquiries into certain areas of market activity. At the same time they could continue to issue non-binding guidelines and recommendations as the CESR had done previously. With the SEC and now the newly-formed ESMA armed with new supervisory roles and new legislation, albeit with some differences, they continued to work to achieve convergent regulatory regimes and, for the US, equivalence in the EU for the US regulatory regime.

 Kern, Steffen. 2011. “The Real G2: Americans, Europeans, and their Role in the G20”, Transatlantic Academy, Washington DC. 39  Tait, Nikki. 2011. “SEC and EU in Talks to Resolve Ratings Impasse”, FT.com, 25 April. 40  The new European System of Financial Supervision (ESFS) framework that came into effect in January 2011 established a regulatory hierarchy where EU-level agencies would establish some binding rules, draft technical standards and investigate certain matters but where individual institutions would remain directly supervised by competent member state authorities. 38

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Under new EU legislation that proposed to amend the credit ratings legislation that came into effect only six months earlier, one of ESMA’s roles would be to directly supervise credit ratings agencies  — taking responsibility from member states.41 As the June 2011 deadline for ratings agencies to endorse ratings created outside the EU loomed, a problem emerged. Some major US banks revealed just weeks before that they would be unable to meet the registration deadline, saying that the process was taking longer than expected.42 In addition the SEC was still in the process of working through its actual rules, meaning EU-based ratings agencies were unable to consider the US regime “as stringent as” the EU regime. There were several meetings between Commission and SEC officials to resolve the problem and the EU, while granting a further deadline for the US, argued that the US financial reforms needed to remain on track for equivalence to be granted.43 In the latter half of 2011, US ratings agencies completed their registration process. All that remained was for the US regulatory framework to be considered equivalent and for the ratings agencies to endorse ratings created outside the US. The former took place in March 2012 when ESMA deemed the US regulatory framework equivalent. In order to allow EU-based ratings agencies to meet the final requirement — that a third country must have a cooperation arrangement with the EU before that country’s ratings could be endorsed — the SEC and ESMA established a formal Memorandum of Understanding for ongoing cooperation.44 Soon after, US-based ratings agencies endorsed EU-based ratings.45

Conclusion: Two Regulatory Regimes Instead of One It had been more than four years since the US proposed tough new legislation to reform credit ratings agencies, a period characterized by political tussles between the US and the EU over regulatory reform. It was a process of discussion and negotiation — taking place in several fora. In the course of years of negotiations in the Financial Markets Regulatory Dialogue and through informal discussion between the Commission and the SEC, and armed a with mandate from heads of state at US-EU summits, both the US and the EU had made concessions in an effort to create a working transatlantic regime that was as convergent as possible. The end result created two regulatory frameworks for credit ratings agencies — one in the US and

 See Regulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May 2011 amending Regulation (EC) No 1060/2009 on credit rating agencies, OJ L145/30. 42  Author interview with US Treasury representative, Brussels, 14 February 2014. 43  Ibid. 44  Masters, Brooke. 2012. “European Banks Allowed to Use US Ratings”, FT.com, 15 March. 45  European Securities Markets Authority. 2012. “ESMA Allows EU-registered credit ratings agencies to Endorse Credit Ratings Issued in the US, Canada, Hong Kong and Singapore”, press release, 15 March 2012. 41

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the other in the EU — that were “coming from different places but ended up in the same place”.46

CASE STUDY 2: Accounting Standards Convergence Another issue-area on which the US and the EU worked closely at the height of the global financial crisis was accounting standards. The US and Europe have historically used different accounting standards. The US has used its own US GAAP (Generally Accepted Accounting Principles), which are based on standards developed by the American Institute of Certified Public Accountants, since 1939. In Europe, the use of accounting standards has historically varied from country to country, largely as a result of cultural differences, differences in legal, financial and taxation systems and in the role and influence of the accountancy profession in various countries.47 There had been concerns as early as the 1960s over different standards in use around the world with the accounting profession widely in favor of the harmonization of accounting and auditing principles.48 In the 1970s and 1980s a number of European Community initiatives aimed to effectively harmonize standards in the internal European market. The company law directives of 1978 and 1983 for instance and a directive on the annual accounts of public limited liability companies established a requirement for individual companies to prepare harmonized accounts. Demand from non-US companies that wanted to access the US capital markets played a big role in the push for international accounting harmonization.49 The 1980s and 1990s saw the growing use by international companies of the well-established US GAAP, at a time when not only the EU lacked a common standards environment but also foreign companies eagerly sought access to the US market.50 Accounting standards are important in company reporting, as they define key accounting terms such as asset, debt and also deal with issues of valuation, all issues for which the treatment differed under GAAP and IFRS. One longstanding US concern for example has been that the varying notions of goodwill

 Author interview with US Treasury representative, Brussels, 14 February 2014.  Dewing, Ian and Russell, Peter. 2008. “Financial Integration in the EU: The First Phase of EU Endorsement of International Accounting Standards”, Journal of Common Market Studies, 46. No. 2: 243–264. 48  “Remarks of Philip R. Lochner, Jr. Commissioner, U.S. Securities and Exchange Commission: The U.S. Role in Achieving International Harmonization of Accounting Standards, speech at the tenth Annual SEC and Financial Reporting Institute Conference los Angeles, California, May 16, 1991. 49  See Camfferman, Kees and Zeff, Stephen. 2007. Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee 1973–2000, Oxford University Press, Oxford: 10.; Posner, Elliot. 2010. “Sequence as Explanation: The International Politics of Accounting Standards”, Review of International Political Economy, 17, No. 4: 640. 50  Posner, op. cit. 46 47

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could cause major differences in the post-acquisition reported income of US companies compared to that of foreign companies.51

Emergence of a European Approach The European Commission even acknowledged in 1995 that its own standards did not meet the same “more demanding standards” required by the SEC in the US.52 As part of the plans to adopt monetary union in the EU, the need for common standards in the EU grew. Pressures had been building not only as a result of the EU’s single market and the introduction of the euro at the start of 1999 but also the gradual globalization of financial markets.53 The efforts to harmonize standards in Europe also had to consider the requirement in the US that any foreign company that wanted to access the US capital markets should file financial statements in US GAAP. The EU could have simply embraced US GAAP standards but embraced the International Financial Reporting Standards (IFRS) instead. First developed in 1973, the standards were developed by the Board of the International Accounting Standards Committee, a committee comprised of professional accounting association representatives. The standards, also referred to as the International Accounting Standards, are now the responsibility of the International Accounting Standards Board (IASB), a London-based not-for-profit private sector organization, which has progressively updated them. The EU’s Accounting Regulation of 2002 established a process for endorsing IFRS for use in the EU and required, from 2005, single financial reporting standards for the consolidated financial statements of all EU companies whose debt or equity securities trade in a regulated market in the EU.54 There are a number of factors that played a role in the decision by the EU to turn to IFRS standards,55 but the EU’s decision was shaped by a number of political considerations. One was the eruption of some of the biggest accounting scandals in history. The year before the EU’s decision, the Enron accounting scandal erupted, in which Texas-based energy company Enron Corporation collapsed in October 2001 owing billions of dollars in debt to creditors and exposing accounting loopholes and

 Remarks of Philip R. Lochner, Jr. Commissioner, U.S. Securities and Exchange Commission: The U.S. Role in Achieving International Harmonization of Accounting Standards, speech at the tenth Annual SEC and Financial Reporting Institute Conference los Angeles, California, May 16, 1991. 52  Communication from the Commission, Accounting Harmonisation: A New Strategy Vis-a-Vis International Harmonisation, 14 November 1995, COM 95 (508). 53  Dewing, Ian and Russell, Peter. 2008. “Financial Integration in the EU: The First Phase of EU Endorsement of International Accounting Standards”, Journal of Common Market Studies, 46. No. 2: 243–264. 54  Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards OJ L 243. 55  Posner, op. cit.: 640. 51

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other major shortcomings in the US standards. Such shortcomings were confirmed by the collapse less than a year later in July 2002 of the telecommunications company WorldCom, which had created billions in illusory earnings and resulted in multiple prosecutions of directors for fraud.56 The latter has since become known as one of the biggest corporate frauds in US history. In addition to the significant criticisms, some scholars also argue EU policymakers were simply unable politically to delegate such an important regulatory function to the Americans.57 Others argue the EU felt it would have greater influence over the London-based standards setting body than the US-based Financial Accounting Standards Board (FASB).58

US-EU Divergence The EU’s adoption of IFRS saw not only a divergence between the US and EU use of accounting standards in the early part of the decade but a significant transatlantic power shift on the issue. While the EU and the US had committed broadly to greater transatlantic integration and to embrace regulatory and standards convergence, the US wanted the EU to use GAAP and the EU wanted the US to use IFRS. In an effective recognition of the growing importance of IFRS standards, the US agreed to a program of convergence between US and EU standards in 2002, with the signing of a Memorandum of Understanding between the US-based FASB and the European-­ based IASB. Named the Norwalk Agreement, each side acknowledged their “commitment to the development of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting”.59 Despite this, in subsequent years accounting standards became the subject of a tussle between respective US and EU authorities over the applicability of both systems of standards in each other’s jurisdictions. The US fiercely defended its use of its own standards, arguing that the GAAP standards, in use for more than 70 years, had been “stress-tested, developed and leavened” for decades, unlike the IFRS standards, and that they were used by more than half of the world’s public companies (many of which are in the US) and were well-understood by investors.60

 Romero, Simon and Atlas, Riva D. 2002. “Worldcom’s Collapse: The Overview; Worldcom Files for Bankruptcy; Largest US Case”, The New York Times, 22 July 2002. 57  Leblond, Patrick. 2011. “EU, US and International Accounting Standards: A Delicate Balancing Act in Governing Global Finance”, Journal of European Public Policy, 18, No. 3. 58  See Posner, op. cit.,who argues EU and US international politics were largely responsible for shaping convergence outcomes; see also see Leblond, op. cit.: 443–461, where it is argued the International Accounting Standards Board was largely an agent of the EU. 59  Financial Accounting Standards Board and the International Accounting Standards Board. 2002. “The Norwalk Agreement,” Memorandum of Understanding, 18 September 18. 60   Tafara, Ethiopis, Director, Office of International Affairs, US Securities and Exchange Commission. 2005. “International Financial Reporting Standards and the US Capital Market”, speech before the Federation of European Accountants, Brussels, 1 December, SEC. 56

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By the mid part of the decade, a number of factors conspired to continue to undermine the US steadfast preference. Not only had the Enron and WorldCom accounting scandals cast doubt over the quality of US GAAP, but other scholars argue a desire to maintain New York’s competitiveness in global capital markets and a fear of isolation for US GAAP and American multinational firms’ preference for one set of standards also played a role in prompting the US to give ground.61 Another factor was that the UK, where many US banks and multinationals operate and have deep relationships, adopted IFRS at the beginning of 2005, further undermining the dominance of US GAAP.62

Towards a Common Standard In August 2006, before the financial crisis started to afflict its heaviest losses on the transatlantic financial system, the SEC in the US and the CESR in Europe agreed to a work plan that would iron out differences in the respective bodies’ standards under a type of cross-recognition framework. However this was much easier said than done. Some financial instruments were and still are highly complex and harmonization was a near impossible task, especially at a time when some financial instruments were new and still evolving. For example, while defining “revenue” might be considered one of the lesser complicated terms to define, the valuation of instruments such as credit default swaps, interest rate options and leveraged assets are much more difficult to define. Agreement on methodologies to value such instruments was even more elusive. There were also vastly different fundamental approaches in the two systems. The US standards were based on a rules-based approach, in contrast to the principles-­ based approach of the IFRS standards (and the UK GAAP standards). The FASB and the IASB subsequently agreed that trying to eliminate differences in some standards was not the best use their resources and instead tried to develop a common system — namely one set of standards that could be used on both sides.63 A problem was that neither the US nor the EU was prepared to give ground. There were significant political obstacles in the US to discard US GAAP and replace it with IFRS (or indeed any other standard). US GAAP had attracted heavy criticisms internationally but the SEC also was under heavy pressure from US business and industry to retain US GAAP and not require the adoption of IFRS. US industry complained that any requirement to use IFRS would be costly and even damaging. In the absence of agreement a new approach emerged: that both sides would use both standards. The SEC in early 2007 proposed that US firms (and foreign firms) could file in either US GAAP or IFRS but the proposal received mixed reactions  Posner, op. cit  Publicly listed companies in the UK have been required to use IFRS since 2011. 63  Financial Accounting Standards Board. 2006. “Completing the February 2006 Memorandum of Understanding: A Progress Report and Timetable for Completion”, Norwalk, Connecticut, September 2008 61 62

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from industry in the US. At the same time the SEC continued with plans to work closely with the EU on a mutual recognition framework as well. The SEC’s Office of Chief Accountant announced plans to work closely with the European Commission and the CESR to develop a framework agreement to this effect.64 This would eventually mean that EU public companies listed on US stock exchanges would not have to reconcile their accounts and report in the US in GAAP figures and US companies listed on European stock exchanges would not need to reconcile and report in Europe in IFRS figures. Six months after a work plan had been agreed with European regulators to work on differences, the SEC agreed with the UK’s Financial Services Authority and the UK Financial Reporting Council to share information to progress the idea.65 The differences were a central subject of discussion at the FMRD meeting in November 2007. The US still maintained that it wanted to continue to use GAAP but would focus on working towards mutual recognition arrangements rather than establishing a single set of standards to use on both sides of the Atlantic.66

SEC Concessions For the EU, having embarked on a complicated path of harmonizing accounting standards within member states, the discarding of IFRS was not an option. To address European concerns the US offered a significant concession. The SEC decided on 15 November 2007 to abolish the requirement for European companies to reconcile their accounts in US GAAP and allow them to file in IFRS instead.67 It was a problem the EU had seen as costly and as constituting a competitive disadvantage for European companies for some time.68 The SEC also saw its decision as one that could “put a shine on the image of the United States in the global capital markets system” and improve capital-raising opportunities for US companies.69 The Europeans still had concerns about the US GAAP standards and as such US companies still needed to report in IFRS in the EU. More than two months later on 1 February 2008, the SEC and the Commission formally agreed on first steps towards mutual recognition after a meeting between SEC Chairman Christopher Cox and the European Commissioner for the Internal Market and Services Charlie McCreevy in Washington. The path would include

 For a full description of the politics behind the US adherence to US GAAP and the EUs use of IFRS see Posner, op. cit. 65  Securities and Exchange Commission. 2007. “SEC, UK FSA, and UK FRC Sign Protocol for Sharing Information on Application of IFRS”, press release, 25 April. 66  European Commission. 2009. “Joint Report on US-EU Financial Markets Regulatory Dialogue for the TEC Meeting”, DG Enterprise, Brussels, 27 October. 67  SEC. 2008. “SEC Takes Action to Improve Consistency of Disclosure to U.S.  Investors in Foreign Companies”, 15 November. 68  Communication from the Commission, Accounting Harmonisation: A New Strategy Vis-a-Vis International Harmonisation, 14 November 1995, COM 95 (508). 69  Johnson, Sarah. 2007. “SEC Allows Dual Accounting System”, CFO Magazine, 15 November. 64

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future mutual recognition discussions about respective methodologies and processes and would involve interested member states as well. The two sides also discussed other related issues including sovereign wealth funds, credit rating agencies, XBRL developments and mutual recognition of securities regulation.70 The SEC also in May 2008 signed agreements to share information about IFRS with financial regulators in four European countries, as it had done with the UK authorities the year before. However, despite the strategy of mutual recognition and information sharing little had been done to close the wide divergences of standards across the Atlantic, particularly in respect to the product areas that were by now starting to wreak havoc in the financial markets. In August 2008, a month before Lehman Brothers collapsed, more than 85 countries required IFRS reporting for all domestic publicly listed companies and a further 26 countries allowed IFRS reporting.71

The SEC Roadmap Towards Convergence By mid 2008 the SEC came under considerable pressure over a range of regulatory shortcomings, including accounting standards.72 Amid the escalating financial crisis and concerns over the failure of US GAAP to comprehensively deal with financial product areas such as Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDSs) — that by now had been exposed as significantly contributing to one of the most severe financial crises in decades — the US proposed a plan for the use of IFRS in the US. On 27 August 2008 the SEC issued a proposed roadmap for the implementation of IFRS that would be phased in. This did not mean US GAAP would be phased out — both standards could be used.73 However, it had taken nearly a year and a severely escalating financial crisis between the SEC’s publication of rules to accept from foreign private issuers in their filings in November 2008 and the SEC’s announcement for a roadmap in for a plan for standards convergence to accelerate. In addition, a roadmap was just a proposal; it still needed to be embraced by industry. Also, despite a Memorandum of Understanding between the US-based FASB and the European-based IASB in 2006 to develop a plan to try and eliminate differences between the two side’s standards it was not until the absolute height of financial markets turmoil, on 11 September 2008, as Lehman Brothers desperately tried  Securities and Exchange Commission. 2008. “Statement of the European Commission and the US Securities and Exchange Commission on Mutual Recognition in Securities Markets”, press release, 1 February. 71  SEC. 2008. “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers”, 14 November. 72  Christopher Cox, SEC Chairman. 2008. “Testimony Concerning the Role of Federal Regulators: Lessons from the Credit Crisis for the Future of Regulation”, testimony before the Committee on Oversight and Government Reform United States House of Representatives, 23 October. 73   Securities and Exchange Commission. 2008. “SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily”, 27 August. 70

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to find a buyer for itself,74 that the two standards bodies announced a timetable to follow through with its earlier plan for convergence.75 After Lehman Brothers filed for bankruptcy on 15 September, the SEC came under even further pressure to hasten accounting standards reform, with the passage of the Emergency Economic Stabilization Act of 2008 (commonly known as the US bailout plan). Enacted on 3 October 2008, among other things it required the SEC to conduct a study of “mark-to-market” accounting applicable to financial institutions and report to Congress with its findings within 90 days. The SEC’s report on Mark-To-Market Accounting, eventually released in December 2008, observed that “developments over the past few years necessitate consideration of the international financial reporting landscape”.76 It noted that of the approximately 113 that required or permitted IFRS reporting for domestic and listed companies, the market capitalisation of exchange listed companies in the EU, Australia, and Israel totaled US$11 trillion or approximately 26% of global market capitalization. It also noted that the market capitalization from those countries plus Brazil and Canada, both of which had announced plans to move to IFRS, totaled US$13.4 trillion  — or approximately 31% of global market capitalization.77 Across the Atlantic, in line with the SEC’s move to recognize IFRS standards, the EU’s European Securities Committee (an agency that was subsequently replaced in 2011 with the European Securities Markets Authority) voted to grant recognition to US GAAP, with the European Parliament passing a similar resolution in October 2008. Implementation issues were also discussed between US and EU regulators at an FMRD meeting in November 2008.78 In a decision and an associated Regulation that established a methodology for determining the equivalence of GAAP, the EU formally granted an exemption to US companies to file their statements in the EU in GAAP.79 To be effective no later than 31 December 2011, since then, in both the US and the EU, companies have been able to use both. EU companies must file in IFRS in the EU and US companies must file in GAAP in the US, but companies may also file in their own markets in the other standard as well.

 Elliott, Larry and Treanor, Jill. 2008. “Lehman Brothers collapse, five years on: ‘We had almost no control’”, 13 September. 75  Financial Accounting Standards Board and the International Accounting Standards Board. 2008. “Completing the February 2006 Memorandum of Understanding: A progress report and timetable for completion”, 11 September. 76  SEC. 2008. “Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting”, 30 December. 77  Ibid. 78  European Commission. 2009. “Joint Report on US-EU Financial Markets Regulatory Dialogue for the TEC Meeting”, DG Enterprise, Brussels, 27 October. 79  Commission Decision 2008/961/EC of 12 December 2008 on the use by third countries’ issuers of securities of certain third country’s national accounting standards and International Financial Reporting Standards to prepare their consolidated financial statements (notified under document number C(2008) 8218) OJ L 340. The Commission’s decision also identified as equivalent to IFRS the Japanese GAAPs, and accepted financial statements using GAAPs of China, Canada, India, South Korea within the EU on a temporary basis. 74

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Progress at a Standstill with Huge Standards Gaps The US and the EU had tried — but failed — to develop a common standard, so instead embraced a strategy of mutual recognition. While this had been discussed and proposed in years leading up the financial crisis, it was not until the height of financial turmoil that efforts were accelerated to speed up plans for transatlantic accounting standards convergence. By the time the G20 Leaders’ Summit in Washington took place on 15 November 2008, progress was at a standstill and huge standards gaps in important financial areas were left open, particularly in relation to the treatment of complex financial instruments. There were also ongoing differences in definitions, procedures and risk categorization and matters relating to the valuation of securities, particularly complex products, disclosure standards for off-­ balance sheet vehicles and the disclosure to the market of holdings of complex financial instruments. These were among the problems that facilitated the financial crisis in the first place. As such, it was clear that mutual recognition had only addressed some of the fundamental problems. At the same time, there were still concerns internationally about the US GAAP standards. In light of concerns arising from the financial crisis that standards were seriously lacking in certain areas, the US and the EU sought to incorporate accounting standards reform in the G20 commitments. Particularly of concern was that complex products like Credit Default Swaps (CDSs) and Collateralised Debt Obligations (CDOs) had generated significant losses in the financial crisis.80

Reform After the G20 Summit The G20 also pledged to review the governance of the IASB itself, but the US wanted a greater role. The US and the EU agreed before the G20 summit to form a new monitoring board that would oversee the International Accounting Standards Committee Foundation (IASCF), the IASB’s governing body.81 The board would comprise representatives of the SEC and the European Commission, as well as a representative of the International Organization of Securities Commission (IOSCO), a body the US was keen on having coordinate securities reform internationally. It would also include representatives of Japan’s Financial Services Agency, an

 Credit default swaps are financial products in which a seller hedges their risk against the risk of the default of a corporate or sovereign bond, and in which the seller effectively buys that risk. Used legitimately as a form of insurance for decades, most of them are traded “over the counter” (in other words out of public scrutiny) but, in the absence of tighter regulation, they became the subject for considerable speculation during the crisis. The insurance giant American International Group had to be bailed out by the US Federal Reserve in September 2008 over its earlier issuance of US$441 billion worth of credit default swaps on collateralized debt obligations that went bad. 81  IFRS Foundation. 2009. “Trustees Enhance Public Accountability Through New Monitoring Board, Complete First Part of Constitution Review”, press release, 29 January 2009. 80

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emerging markets committee and a technical committee. The Basel Committee on Banking Supervision (BCBS) could have observer status. The main intention was to provide political oversight of the IASC Foundation while the IASB and the FASB continued to work on technical and political issues of common concern between the US and the EU. After the respective mutual recognition by the US and the EU and following the G20 commitments in Washington, the IASB in London and the FASB in Washington updated their agendas. These included tackling off-balance sheet activity, financial instruments and tackling loan loss accounting issues.82 The goals became once again to pursue the ultimate goal of the development of “a common set of high-quality standards” for use globally but in the meantime eliminate or minimize the differences.83 The SEC subsequently (in February 2010) updated its timeline that saw 2015 as the new date for the use of IFRS by US public companies.84 The mutual recognition of accounting standards for respective sides’ public companies was a significant move for the EU that had stridently pushed for the universal adoption of IFRS. However in July 2012, a SEC report offered no decision as to whether IFRS should be required in the US financial reporting system, or how such incorporation should occur.85 EU and US companies could continue to file in both standards.

US-EU Compromise and Towards Convergence Over a period of more than five years the US and the EU had worked closely to effectively negotiate a transatlantic accounting standards regime. When the EU embraced IFRS, at a time when US standards were under fire over their facilitation of major accounting scandals in the US, the ability of the US to insist on the use of its own GAAP standards was significantly undermined. Political imperatives forced the goal of establishing just one common standard for use in both the US and the EU to give way to the goal of mutual recognition. The process of negotiation that followed, particularly as the financial crisis enveloped on both sides of the Atlantic towards the end of the decade, was characterized by give and take on the part of both the US and the EU to reach a compromise that would work for both sides. This is in line with earlier observations about the negotiating of

 Financial Accounting Standards Board. 2009. “IASB and FASB Announce Further Steps in Response to Global Financial Crisis”, press release, 24 March. 83  Financial Accounting Standards Board. 2009. “IASB and FASB Reaffirm Commitment to Memorandum of Understanding”, press release, 5 November. 84  European Commission. 2010. “Report to the European Securities Committee and to the European Parliament on Convergence between International Financial Reporting Standards (IFRS) and Third Country National Generally Accepted Accounting Principles (GAAPs)”, SEC(2010)681, Brussels, 4 June. 85  Fleming, Jeremy. 2013. “EU-US Trade Deal Offers Hope on Reporting Convergence”, Euractiv, 22 November 2013. 82

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accounting standards between the two in the decade earlier. Posner for instance argued that a series of “reactions and counter-reactions” first by European and then US companies and political authorities transformed the EU standards landscape.86 The process also highlighted how the US had not only accepted as a political reality the use of IFRS but had also accommodated the EU’s political preferences on accounting standards, notably its preference for IFRS. In addition to exempting European (and other foreign) companies from filing in US GAAP and proposing a US roadmap for the implementation of IFRS, the SEC also conceded its own dominance in the area of global accounting standards setting by working with the EU to establish an oversight board over the IASB. At the same time the EU had accommodated the US preference by agreeing on bilateral discussions to a mutual recognition framework and developing it through transgovernmental negotiations. However, it took financial crisis to accelerate the process of convergence  — through a strategy of seeking standards equivalence for US companies in the US and EU companies in the US and with the respective US and EU standards bodies attempting to reach agreement on particular standards. It was not until the midst of crisis that the SEC announced a roadmap for IFRS adoption in the US and not until crisis that the IASB and the FASB sought to accelerate their longstanding commitment to try and eliminate differences in the standards. A significant motivator for the convergence process was the interconnectedness of the US and EU markets. In a speech in New York on financial reporting standards in the midst of crisis SEC Chairman Christopher Cox invoked the words of former US President Benjamin Franklin. “It is precisely because none of us is sitting untouched by the currents and waves of global finance that we must recognize, as Benjamin Franklin astutely put it, that ‘we must all hang together, or most assuredly we shall all hang separately’,” he said.

CASE STUDY 3: Credit Default Swaps Reform A further major issue-area identified as needing regulatory reform at the G20 Leaders’ Summit was the tackling of the complex area of derivatives trading.87 The instruments that generated the largest losses in the financial crisis were forms of derivatives, notably the now-infamous Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDSs). CDOs were derived from subprime mortgages and

 Posner, op. cit.  Derivatives is a broad term that refers to financial instruments that derive from another asset, so an option is a contract that allows a buyer to buy or sell an underlying asset (such as a share in a company) at a specified price for example. Such an option derives from the underlying share. There are literally hundreds of derivative financial instruments that are traded in markets around the world – stock options, futures contracts, foreign exchange swaps, commodity options and credit default swaps. Many have been used legitimately for many decades as a form of insurance. For example airlines buy commodity options to set the price of fuel ahead of time and effectively mitigate the risk of fuel price rises over the course of the year.

86 87

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CDSs are derived from the issuance of a loan to a corporate or a country.88 The types of and the markets for derivatives have grown exponentially over the last several decades. In Europe, derivatives transactions accounted for about 20% of all European financial services revenue and about 0.4% of EU GDP in 2008.89 Its growth has been the result of deregulation, opening the market to a wider pool of investors and the proliferation of trading technologies, among other reasons. One notable change has been opening the market beyond those who use them for commercial purposes — whether this is hedging fuel prices, wheat prices or insuring against loan defaults — to a wide range of market participants. In short, deregulation has also opened the market up to market participants who can now fairly be categorised as corporate gamblers. One major issue that regulators sought to address was the issue of over-the-­ counter (OTC) derivatives trading — trading between and among banks and financial firms that takes place in private and hence beyond public scrutiny. The scale of this type of trading is extraordinary. At the end of 2013 by some industry estimated the notional total amount of outstanding over-the-trading derivatives contracts was US$710 trillion globally.90 This meant a very large proportion of financial market transactions were unregulated, not subject to common risk management practices of standards, not transparent and also potentially open to abuse and “rogue” activity. Furthermore, some derivatives contracts were leveraged, in which buyers borrowed money to buy more of them. The losses generated in such circumstances can be large. This was the case with a lot of the trading in CDOs and CDSs (Fig. 6.1). Note: The figure shows the notional amounts outstanding in on- vs. off-exchange market segments in USD trillions from 1998–2008. The trend shows outstanding amounts worldwide, where European exchanges’ market share is shown separately (no similar geographic breakdown exists in OTC data).

CDS “Virtually Unregulated” While the SEC and the Commission had agreed to work towards a plan for mutual recognition of each other’s securities regulatory regimes in February 2008,91 it was not until the near-collapse in mid-March 2008 of US investment bank Bear Stearns that US regulators saw the need to hasten their efforts to address CDS issue

 CDSs can be quasi-insurance policies that provide insurance against default for a range of debt instruments, for example corporate and sovereign bonds, bond indexes and securitisations. 89  Deutsche Börse Group. 2008. “The Global Derivatives Market - An Introduction”, white paper, Frankfurt, May 2008. 90  Bank for International Settlements. 2014. “OTC Derivatives Market Activity in the Second Half of 2013”, 8 May. 91  The SEC followed up with plans to form separate mutual recognition arrangement with Canada, whose provinces not federal government regulated financial instruments, and another with Australia, see Securities and Exchange Commission. 2008. “SEC Announces Next Steps for Implementation of Mutual Recognition Concept”, press release, 24 March. 88

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Fig. 6.1  The size of derivatives markets in 2008: on- and off-exchange. (Source: Bank for International Settlements (BIS) (European Commission. 2009. “Commission Staff Working Paper Accompanying the Commission Communication Ensuring Efficient, Safe and Sound Derivatives Markets”, WP 905 final, Brussels, July 2009)

specifically.92 Bear Stearns had heavily traded in both CDOs and CDSs and exemplified the excesses of the financial crisis and the lack of regulation. Prior to 2008 credit default swaps were, in the SEC’s words, “virtually unregulated” in the US.93 In the EU, despite warnings from the EU’s Committee on Payment and Settlement Systems in 1998, the EU had done little to mitigate the risks inherent in the fastgrowing OTC derivatives markets. When Bear Sterns was sold to JP Morgan in mid-March, amid revelations about the scale of its risky trading in CDOs and CDS, the SEC and the Commodity Futures Trading Commission (CFTC) started to work on what they called “this burgeoning area of financial innovation” to see how they should be best regulated under federal law.94 Discussions between the US and the EU in the early part of the year continued to focus on defining the process for carrying out a comparability assessment of EU and US securities regimes but not addressing specific regulatory changes.95 The EU took a similar approach, with the ECOFIN Council on 3 June 2008 asking the ECB and the pan-EU committee of regulators, the CESR, to simply review standards for derivatives trading in the EU.

 US Mission to the EU. 2009. “Report of the US Mission to the EU”, November.  Securities and Exchange Commission. 2008. “SEC Chairman Cox Statement on MOU with Federal Reserve, CFTC to Address Credit Default Swaps”, press release, 15 November. 94  Commodities Futures Trading Commission. 2008. “CFTC, SEC Sign Agreement to Enhance Coordination, Facilitate Review of New Derivative Products”, 11 March. 95  US Mission to the EU, op. cit. 92 93

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US Moves to Direct CDSs through Clearinghouses Despite Bear Sterns and the ongoing market turmoil, months went by and it was not until the collapse of Lehman Brothers and the bailout the week after by the US Government of US insurer AIG that the need to address regulatory reform dramatically intensified on both sides of the Atlantic. Both Lehman Brothers and AIG were masters in risky derivatives trading. In discussions between the US and the EU it was agreed that one of the first targets would be to bring more OTC trading out into the open. CDS trading was one of the first areas targeted. According to the International Swaps and Derivatives Association (ISDA) the outstanding “notional” value of debt insured by these swaps jumped from less than US$1 trillion in late 2000 to a notional value of around US$62 trillion at the end of 2007.96The Bank for International Settlements put the value at US$60 trillion and estimated this was worth about 10% of the total derivatives market.97 While these figures were disputed (critics argue these figures take into account both the buy and sell sides of a trade among other things), it can be noted that the gross domestic product of the entire world economy in 2013 was US$84.97 trillion in purchasing power parity terms.98 Another problem — that had a particularly transatlantic dimension to it — was that some trading in CDSs was subject to much speculation in the market, including arbitrage opportunities that exploited price differences between the US and the EU markets. The markets in both allowed what is referred to as “naked” credit default swap trading, where the party trading the CDS does not even own the underlying asset (i.e. the credit it has issued to another party) but is allowed to trade it as if they do anyway. Some market participants, particularly hedge funds, frequently betted on corporate and sovereign defaults and were accused of intensifying the panic. Naked selling allowed some traders to force prices down much lower than would have been possible if the trader had owned the underlying assets.99 Several years earlier US billionaire Warren Buffett had called CDSs “time bombs” that could push companies onto a “spiral that can lead to a corporate meltdown”.100 The SEC at the time, however, was reluctant to intervene aggressively. It proposed a new anti-fraud rule on naked selling in March, intervened more decisively in mid-July with a temporary emergency order to require traders to actually own the underlying asset before trading it, extended the order in late July but  The size of the market can be disputed. For instance these figures include both sides of every trade (the buy and sell sides), which effectively doubles the notional value. Some values are also inflated by CDSs that are leveraged. See Laing, Jonathan R. 2008. “Defusing the Credit-Default Swap Bomb”, The Wall Street Journal, 17 November 97  European Commission. 2008. “Time for Regulators to get a Better view of Derivatives”, press release, 17 October. 98  CIA World Factbook, November 2014. 99  Securities and Exchange Commission. 2008. “SEC Issues New Rules to Protect Investors against Naked Short Selling Abuses”, press release, press release, 17 September. 100  “Buffett Warns on Investment ‘Time Bomb’”, BBC News, 4 March 2003. 96

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only for another two weeks and on 17 September, two days after Lehman Brothers collapsed, banned only some aspects of naked selling.101

The EU Acts on Credit Default Swaps The mounting losses in the US were mirrored in Europe. Numerous European banks heavily bought CDSs in the lead up to the financial crisis. The value of European banks’ deals with AIG alone was estimated at US$426 billion in 2007.102 As of 2007 around 35% of global CDS trades involved at least one party domiciled in the EU and around 39% of CDSs were denominated in euro.103 The Franco-Belgian bank Dexia, which required US$8.7 billion in government bailouts, was one of the largest buyers. One of the problems that had arisen was that banks also bought CDSs not only to be part of the money-making machine but also for regulatory avoidance reasons. Under the Basel Accords, the prudential standards set by the Basel Committee on Banking Supervision and incorporated into European (and US and many developed countries’ domestic laws) banks must set aside a certain percentage of financial reserves to cover potential losses. However, CDSs were technically assets (and only losses if they went bad). As such, CDSs allowed banks to make it appear as though they had more assets and this freed up their capital requirements and allowed them to lend out even more money than the Basel standards allowed.104 Weeks after the collapse of Lehman Brothers on September 15, the EU Internal Market and Services Commissioner Charlie McCreevy convened a meeting in mid-­ October of all the main players to respond in line with the US. He initially targeted the end of the year to have developed concrete proposals to manage the risks from credit derivatives.105 The Commission agreed with the US that OTC — and CDS trading more specifically — should be conducting through clearinghouses. It was the EU’s first response to the complex area of derivatives reform for some time. The ECB and the CESR’s earlier standards-developing work on the area had been

 Securities and Exchange Commission. 2008. “SEC Enhances Investor Protections Against Naked Short Selling”, press release, 15 July; Securities and Exchange Commission. 2008. “SEC Extends Order Limiting Naked Short Selling Through August 12”, press release, 29 July; Securities and Exchange Commission. 2008. “SEC Issues New Rules to Protect Investors against Naked Short Selling Abuses”, press release, press release, 17 September. 102  Henry, David; Goldstein, Matthew and Matlack, Carol. 2008. “How AIG’s Credit Loophole Squeezed Europe’s Banks”, Bloomberg BusinessWeek, 15 October. 103  Freund, Dr. Corinna. 2009. “The Role of Europe in the Global CDS Market”, presentation to the European Central Bank, 13 February, Frankfurt am Main. 104  Henry et al., op. cit. 105  European Commission. 2008. “Time for Regulators to get a Better view of Derivatives”, press release, 17 October. 101

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“frozen” in 2005 due to scope, content and uncertainty over the legal basis of its recommendations.106 Even so in October 2008 the ECB and the CESR issued further (non-binding) recommendations on derivatives trading although these mainly concerned standards around trading, transparency, risk management and competition issues.107 Even though the broad issue of OTC trading and derivatives regulation had been on the EU agenda, and despite the US response, the EU had still yet to develop a regulatory response.108 The next month Commissioner McCreevy asked a high-level expert committee, the De Larosière Committee, to recommend measures to reduce the risks in the market as part of a comprehensive review of financial regulation and supervision. While the EU was still considering its response, the US moved ahead and led the agenda through international fora, notably the G20.

The US Makes CDSs Top Priority On the first day of the G20 Leaders’ Summit in Washington on 14–15 November 2008 the US Administration’s President’s Working Group on Financial Markets announced that ensuring trading in credit default swaps was directed through central counterparty services had become its “top near-term priority”.109 The SEC, a key member of the working group, moved simultaneously to tackle the regulation of the OTC market in CDSs by teaming up with the Federal Reserve Board and the CFTS and proposing to require all CDS trading to go via clearinghouses.110 Clearinghouses (or clearing agencies or central counterparties) are services that provide clearing and settlements of trades at central market level. At the prompting of the President’s Working Group on Financial Markets several potential central counterparty providers accelerated their efforts to facilitate the change.111 Four groups were positioned to set up a central counterparty: the US-based Clearing Corporation, which was being acquired by Intercontinental Exchange; the CME Group, the world’s largest futures exchange; Liffe, the derivatives arm of the  European Central Bank. 2008. “ESCB and CESR Consult on Recommendations for Securities Clearing and Settlement Systems and Central Counterparties in the European Union”, press release, 23 October. 107  European Central Bank. 2008. “CESR/ESCB Consultation Paper Draft Recommendations for Securities Settlement Systems and Draft Recommendations for Central Counterparties”, Consultation Paper, Frankfurt, October 2008. 108   European Commission. 2009. “Commission Staff Working Paper Accompanying the Commission Communication Ensuring Efficient, Safe and Sound Derivatives Markets”, WP 905 final, Brussels, July 2009. 109  US Treasury. 2008. “PWG Announces Initiatives to Strengthen OTC Derivatives Oversight and Infrastructure”, press release, 14 November. 110  Securities and Exchange Commission. 2008. “SEC Chairman Cox Statement on MOU with Federal Reserve, CFTC to Address Credit Default Swaps”, press release, 15 November. 111  US Treasury, 2008, op. cit. 106

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New  York Stock Exchange Group; and Eurex, the derivatives arm of Deutsche Börse.112 Central clearing would mean all trades would be registered, subject to rules and controls, reported and hence more transparent. They would also by subject to the clearinghouses’ own risk management procedures. All the clearinghouses that had lined up to provide clearing services were based in the US and the EU and risked being left behind by fast developments.

The G20 Washington Summit Agenda After the G20 Leaders’ Summit in Washington on 14–15 November, G20 leaders agreed to strengthen the resilience and transparency of credit derivatives markets and reduce systemic risks, including by improving the infrastructure of over-the-­ counter markets. The specific 47-point action plan had been negotiated between participating countries, including the US and the EU, and agreed among G20 sherpas beforehand.113 The action plan also required supervisors and regulators to speed up efforts to reduce the CDS and OTC derivatives trading systemic risks, insist that market participants support exchange traded or electronic trading platforms for CDS contracts and expand OTC derivatives market transparency. It also noted that this should take place in the context of the “imminent launch of central counterparty services for credit default swaps” in some countries.114 The agreement over the broad course of action between the US and the EU, which together dominate the G20, effectively guaranteed the course of action to be taken by the G20. As such the G20 summit served to merely confirm the US and the EU approach. Furthermore the EU’s agreement with the US pre-empted the recommendations the Commission had asked the De Larosière Committee to formulate on the reform of financial markets only weeks before. While the US and EU had agreed ahead that CDSs would be traded in clearinghouses and that trading would therefore become more transparent, they had not worked out how. Within days of the G20 Summit, US and EU regulatory officials met in Brussels to discuss the details of the G20 commitments, including tackling credit default swaps.115 European regulators were uncomfortable with the prospect of a US-only clearinghouse outcome and wanted “at least one European solution” for the creation of a central CDS clearinghouse.116 The meeting on 19 November 2008 considered a range of emergency measures to tackle the crisis and came as US Treasury Secretary Henry Paulson was thrashing out his US$700 billion bailout  “Central CDS Clearing Houses Poised for Approval”, FT.com, 18 November 2008.  Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 114  G20. 2008. “Declaration of the Summit on Financial Markets and the World Economy”, Washington DC, 15 November. 115  “Central CDS Clearing Houses Poised for Approval”, FT.com, 18 November 2008. 116  Ibid. 112

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plan. Commission staff and a range of US regulators held a further meeting (a videoconference) under the umbrella of the Financial Markets Regulatory Dialogue and discussed a range of initiatives related to reducing or eliminating regulatory differences.117 Significant differences of opinion over tackling CDS trading started to emerge between the US and the EU. On 2 December 2008, the EU Council backed “as a first step and as a matter of urgency” a Commission proposal to create “one or more” European clearinghouse with clearing capacities in OTC derivatives while working to maintain “coherence with parallel initiatives at global level”.118 The ECB also weighed into the debate later in the month, urging there was a need “for at least one” European clearinghouse for credit derivatives and that, given the systemic importance of securities clearing, it “should be located within the euro area”.119 The first clearinghouse ready to operate was in London, the largest derivatives trading market in the world. To get CDS transactions going through at least one clearinghouse quickly, the SEC needed to amend its rules, as London was outside its jurisdiction. Not amending its rules meant all US derivatives contracts risked being locked out of the largest derivatives trading centre in the world. So the SEC in late December responded with a temporary exemption for London-based LCH. Clearnet Ltd.120 to operate as a central counterparty for credit default swaps.121 At a time the EU appeared to be moving towards developing its own regulatory preferences, albeit in cooperation with the US, the US response to differences of opinion with the EU was to also form a new global forum dedicated to the very specific area of the regulation of credit default swaps and central clearinghouses. The OTC Derivatives Regulators’ Forum first met at the Federal Reserve in New York in January 2009 and included representatives of the Federal Reserve, the US CFTC, the SEC, as well as the UK Financial Services Authority, the German Federal Financial Services Authority, Deutsche Bundesbank, the New York State Banking Department, with the ECB and the Hungarian Financial Services Authority in their roles as co-chairs of the EU’s ESCB-CESR Working Group on Central Counterparties. The official aim was to “mutually support” each regulator in carrying out its respective authorities and also apply consistent standards and promote consistent public policy objectives and oversight approaches for all CDS clearinghouses.122 However, the unofficial aim was to propagate the US approach to regulation and  National Association of Insurance Commissioners, op. cit.  Council of the European Union. 2008. “Council Conclusions on Clearing and Settlement”, press release, Brussels, 16,212/08, 24 November 2008, viewed 12 May 2013. 119  European Central Bank. 2008. “Decisions Taken by the Governing Council of the ECB”, 18 December. 120  Majority owned by the London Stock Exchange and the largest derivatives clearing houses globally, LCH.Clearnet Ltd. provides clearing and settlement services for both the exchange traded and the OTC commodity markets globally. 121  Securities and Exchange Commission. 2008. “SEC Approves Exemptions to Allow Central Counterparty for Credit Default Swaps”, press release, 23 December, 122  Federal Reserve Bank of New York. 2009. “A Global Framework for Cooperation among CDS CCP Regulators”, press release, 19 February 2009. 117 118

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shape regulatory outcomes in the EU. The forum has continued to meet on an occasional basis since. The EU meanwhile continued to push ahead with a European “solution”.

ECB Consultation The EU started a process of consulting with industry on their requirements and needs. On 24 February 2009 the ECB hosted a meeting of representatives of the European banking and clearing industry, the Eurosystem, the European Commission, the EU Council, the European Parliament and other stakeholders to discuss the issues involved in establishing a European system for credit default swaps (CDS). The same month the De Larosière Committee handed down its report, recommending the introduction of at least one well-capitalised central clearinghouse for credit default swaps in the EU — in line with the Commission and the Council’s already established preference.123 In March nine major banks committed to use one or more clearinghouses, once they were established, to clear CDS trades based on European companies or indexes.124 In a letter to McCreevy they noted several outstanding technical, regulatory, legal and practical issues to reach the goal set by the Commission of 31 July 2009, including contractual specifications, the process for cash settlement, establishing a dispute resolution mechanism and risk-related issues.125 In light of the values, volumes and transatlantic nature of electronic derivatives trading, the US and the EU needed to closely coordinate. It had been recognized that derivatives trading was especially mobile and that coordination was imperative.126 The same month the US SEC gave the go-ahead in March for two US-based clearinghouses to clear CDS trades in the US (ICE US Trust LLC and the Chicago Mercantile Exchange Inc.). Both the US and the EU now had clearinghouses were CDS trade could take place. The SEC later gave the go-ahead for two EU-based clearinghouses, ICE Clear Europe Limited and Eurex Clearing AG,127 and the UK’s Financial Services Authority gave approval for another clearinghouse, Ice Clear Europe, just two days before the Commission’s July 31 deadline. However, substantial issues remained to be sorted out. While the G20 Leaders’ Summit in London in April confirmed the idea of establishing central clearing  The High-Level Group on Financial Supervision in the EU”. 2009. “Report”, chaired by Jacques de Larosière, Brussels, 25 February. 124  The banks were Barclays Capital Citigroup Global Markets Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Morgan Stanley and UBS. 125  International Swaps and Derivatives Association. 2009. “Letter to Commissioner Charlie McCreevy”, London, 11 March. 126  Author interview with US Treasury representative, Brussels, 14 February 2014. 127  Securities and Exchange Commission. 2009. “SEC Approves Exemptions Allowing ICE Clear Europe Limited and Eurex Clearing AG to Operate Central Counterparties for Credit Default Swaps”, press release, 23 July. 123

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counterparties “subject to effective regulation and supervision”,128 the arrangements between the world’s two largest derivatives markets were complex. Industry had impressed the great importance of common standards, procedures, regulatory approaches, capital requirements data privacy and contractual matters.129 Over the next two months US regulators at the SEC, the Commodity Futures Trading Commission (CFTC) and US Treasury and the Commission and ECB worked closely on coordinating their respective regulatory reform proposals for a wide range of financial reforms, among them derivatives reform. The respective US and EU derivatives reforms were discussed in June of 2009 at the next FMRD meeting.

The Obama Administration’s Proposals On 17 June 2009 the Obama Administration released a lengthy detailed plan for financial regulatory reform, proposing new supervisory arrangements, including a new Financial Oversight Council, a new National Bank Supervisor, authority for the Federal Reserve to oversee payment, clearing, and settlement systems, a new Consumer Financial Protection Agency, a new bank resolution mechanism for failed banks, and also reforms to require standardized OTC derivative transactions to be executed in regulated central clearinghouses.130 The US proposals had closely followed by just three weeks the European Commission’s own proposals for wide-­ ranging financial supervisory reform.131 A week later the ECB and CESR recommended some well overdue measures to improve safety and soundness of clearing and settlement systems in the EU. Still non-binding, they were based on draft recommendations for securities settlement systems proposed nearly eight years earlier in November 2001 and recommendations issued by the global securities body, the International Organization of Securities Commissions, nearly five years earlier in November 2004.132 Nevertheless a week after this the European Commission revealed plans for reform of its derivatives markets”.133 While mirroring the US proposal for central clearing of CDS

 G20. 2009. “Declaration on Strengthening the Financial System (Annex to London Summit Communiqué)”, London, 2 April. 129  O’Connor, Paul. 2009. “CCP for CDS User Requirements”, European Banking Federation presentation to the European Central Bank, 24 February. 130  US Treasury. 2009. “Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation”, Washington DC, 17 June. 131  Communication from the Commission, Communication from the Commission on European Financial Supervision, May 2009, COM(2009) 252. 132  European Central Bank. 2009. “ESCB and CESR Issue Recommendations to Increase Safety and Soundness of the Post-Trading Infrastructure”, press release, 23 June. 133   European Commission. 2009. “Commission Staff Working Paper Accompanying the Commission Communication Ensuring Efficient, Safe and Sound Derivatives Markets”, WP 905 final, Brussels, July 2009. 128

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trades and standardized contracts, the Commission had also proposed other measures, such as requiring central storage in data repositories, the collection of information on the number of transactions and size of contracts, and the public display and disclosure of all price and other trade-related information. However, these were the sorts of things the US preferred to leave to industry to work out.134 In the EU, by the end of the month  — the 31 July 2009 deadline set by the Commission for central clearing of CDS trading to be ready — ten major US and EU dealers had agreed to clear CDS on European reference entities and indices through one or more EU-regulated clearinghouses.135 The Commission subsequently set up a working group, involving US and EU dealers, clearinghouses and supervisors to monitor the rollout. Meanwhile after discussion with EU authorities, the US Treasury sent legislation (the Over-the-Counter Derivatives Markets Act of 2009) to Congress that would also direct OTC derivatives trading onto exchanges. This legislation was subsequently incorporated into the Dodd–Frank Wall Street Reform and Consumer Protection Act, widely hailed as the most wide-reaching reforms to financial regulation in the US since the Great Depression. However, the negotiations between the US and the EU to direct OTC derivatives trading onto clearinghouses had dealt with one segment of the market. Convergence of the highly complex area of derivatives regulation generally would require further negotiations on a range of other issues, including the standardisation of contracts, data privacy, common standards and regulatory enforcement. In addition there was the issue of how CDS trading and OTC trading was connected to other areas of the derivatives markets. As the Commission noted, the “level of interconnection and hence the spillover effects” between the various segments of the markets was “extremely high”.136 For example the market prices of CDSs affect the prices of other instruments, some of which were regulated and some of which were not. Most major US and EU banks traded in most if not all of the different product areas. Furthermore, as CDSs effectively insure the risk of default, CDS prices have a direct impact on the financing costs of companies — and sovereign countries in the case of country CDS. “These characteristics proved to be the Achilles heel of the OTC market during the current crisis,” the Commission noted in a technical paper in July.137 In addition there was the Basel banking rules to address, as they had allowed many banks to undermine the banking prudential requirements by trading big in CDSs in the first place. Further there was the issue of risk management in the financial system as a whole. These problems set the scene for ongoing close negotiations between the US and the EU in the lead up to yet a further G20 Summit in Pittsburgh in September 2009.

 Author interview with US Treasury representative, Brussels, 14 February 2014.  European Commission. 2009. “Major Step Towards Financial Stability: European Market for Credit Default Swaps Becomes Safer”, press release, IP/09/1215, 31 July. 136   European Commission. 2009. “Commission Staff Working Paper Accompanying the Commission Communication Ensuring Efficient, Safe and Sound Derivatives Markets”, WP 905 final, Brussels, July 2009. 137  Ibid. 134 135

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Pittsburgh Tackles OTC Derivatives G20 leaders pledged in Pittsburgh that “all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest”.138 In addition OTC derivative contracts should be reported to trade repositories and non-centrally cleared contracts should be subject to higher capital requirements. The rules agreed virtually mirrored the arrangements the US and EU had already established themselves. The G20 further tasked the Basel-based Financial Stability Board to monitor implementation and assess their adequacy of the measures being adopted by member countries. Ten days later EU and US regulators, including CFTC Chairman Gary Gensler, sat down in Brussels to specifically discuss OTC derivatives market reform. Organised by the Commission’s DG Internal Market, the conference discussed both sides’ respective proposals and results of an industry consultation on which direction EU regulation of the derivatives markets should take.139 Both sides continued to work together to coordinate approaches through the Financial Markets Regulatory Dialogue in a meeting on 27 October 2009140 and through the new global forum, the New  York Federal Reserve-chaired OTC Derivatives Regulators Forum.141 By October 2009 both the US and the EU had agreed in principle that reporting all OTC derivative contracts to trade repositories, clearing all standardized contracts through central counterparties (or clearinghouses) and shifting trading of standardized contracts onto exchanges/electronic platforms was the best way forward.142 Other objectives agreed were to reduce systemic risk143 and protect against market abuse. There was a further US-EU summit in Washington on 3 November 2009 that discussed derivatives reform. The US Treasury’s legislation was later revised in Congress and passed on 11 December 2009, as part of the Wall Street Reform and Consumer Protection Act of 2009. It was not until nine months later on 15 September 2010 that the Commission released its legislative proposal: a Regulation on OTC

 G20. 2009. “Leaders Statement: The Pittsburgh Summit”, 24–25 September.  European Commission, DG Internal Market, op. cit.; US Mission to the EU, “US Newsletter from the US Mission to the European Union”, Issue 6, September/October 2009, viewed 11 November 2014. 140  European Commission. 2009. “Joint Report on US-EU Financial Markets Regulatory Dialogue for the TEC Meeting”, DG Enterprise, Brussels, 27 October. 141  European Commission, DG Internal Market, op. cit. 142  European Commission. 2009. “Joint Report on US-EU Financial Markets Regulatory Dialogue for the TEC Meeting”, DG Enterprise, Brussels, 27 October. 143  This issue was one taken up by the new European Systemic Risk Board and in the US the Financial Stability Oversight Council. The former was established under the new legislation that established the new European Financial supervisory system from January 2011 and the latter was established under the Dodd–Frank Wall Street Reform and Consumer Protection Act. Both organizations continued to consult regularly throughout 2012 on coordinating risk management in the transatlantic financial system. 138 139

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Derivatives, Central Counterparties and Trade Repositories.144 It set out a range of reporting obligations for OTC derivatives, requirements for all OTC derivatives to be operated through clearinghouses, measures to reduce credit and operational risk for bilaterally, common rules for clearinghouses and rules around the establishment of interoperability between clearinghouses. It took a further 18 months of negotiation with the European Parliament, with the Commission and Parliament only reaching agreement in February 2012. Finally adopted on July 2012 and entering into force on 16 August 2012, the regulation (known as the European Market Infrastructure Regulation, or “EMIR”) was the EU’s first package of wide-reaching legislation addressing the derivatives market.

Conclusion The regulation of credit ratings agencies, the lack of convergence in US and EU accounting standards and the regulation of credit default swaps became political issues in the midst of the financial crisis 2008–09. Both the US and EU saw regulatory coordination as critical. Coming into negotiations with differing domestic preferences and different historical approaches, significant challenges to achieving policy convergence remained. Throughout the regulatory cooperation on key areas  — including accounting standards, credit ratings agencies and credit default swaps reforms among others — the US and the EU worked closely at intergovernmental level and transgovernmental level through various fora. Patterns emerged in all three areas. The US and the EU developed their own approaches, which were then discussed in various fora, including the FMRD set up to discuss various issues of concern. In all cases the US and the EU made concessions to each other, with a view to achieving a level of policy convergence, even harmonization. The degree of success varied, however. In one case, there was very little progress but nevertheless a mutual recognition regime with flaws; in another US-EU negotiations over reforms created two regulatory frameworks with regulatory equivalence — one in the US and the other in the EU — that were “coming from different places but ended up in the same place”.145 In the third, mutually agreed rules were negotiated for application in the international rulemaking environment. This sums up much of the rulemaking efforts in the transatlantic context in recent decades.

 European Commission. 2010. “Proposal for a Regulation of The European Parliament and of the Council on OTC Derivatives, Central Counterparties and Trade Repositories”, COM(2010) 484/5, Brussels. 145  Author interview with US Treasury representative, Brussels, 14 February 2014. 144

Chapter 7

The US-EU Relationship in International Forums

Around 20 years ago, the US was the world’s largest economy, generating 30.49% of global GDP in 2000. The EU was second, generating 22.59% and China third, generating just 3.6% of global GDP. In just two decades this has changed dramatically. China has powered ahead and in 2019 comprised an enormous 16.34% of global GDP1. However, US GDP comprised 24.41% of GDP in 2019 and the EU 17.80%. Acting together, the US and EU economies are by far the largest, comprising 42.21% of global GDP. This is important because on many occasions they do indeed act together. This fact has not escaped neither the US nor the EU, which have sought to reinforce their mutual and interdependent interests in key international financial fora. In virtually every international financial institution (IFIs) that makes rules for the global financial system, the US and the EU dominate. This means that when they choose to work together, they have effective control over the regulatory outcomes that apply to most of the world’s largest economies. This is because the world’s financial system is structured in a way that provides strong incentives for countries and regional organizations to implement global rules. This is not always the case because the US and the EU do not always agree on matters. Some countries and organizations are also more influenced by the US or the EU or indeed other large world powers. In addition, many states do not comply in all cases with rules set down by IFIs and in some cases they implement some rules or aspects of rules and not others. However, a large body of regulatory outcomes are a direct consequence of the US and the EU working together in a deliberative alliance. The transatlantic regulatory relationship is now acknowledged as a core source of rulemaking for global economic activity2.  World Bank, databank  Drezner, Daniel W. 2007. All Politics is Global: Explaining International Regulatory Regimes, Princeton University Press, Princeton. 1 2

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This chapter discusses how the US and the EU cooperative relationship on financial markets in the global financial rulemaking environment has evolved in recent decades. It discusses how although the US and the EU have remained rivals, they have formed a defacto alliance to develop a common position on matters of mutual interest and reinforced these in IFIs. This was evident during the global financial crisis, with a key outcome being a maintenance of US-EU “club” dominance, but a changed US-EU power balance.

Who Comprises Global Financial Governance Concepts of international governance can be seen from several perspectives, one of which focuses on international financial institutions (IFIs). Governance created by IFIs in the area of international finance can be placed under four categories. Firstly, the principal standards-setting bodies in the three main areas of the financial system: Basel Committee on Banking Supervision (BCBS), which aims to oversee micro- and macro-prudential banking regulation and micro-prudential banking supervision; International Organisation of Securities Commissions (IOSCO), which works to create standards in the area of securities; and the International Association of Insurance Supervisors (IAIS), which sets international standards for the insurance and reinsurance sectors. There is also the Joint Forum, established in 1996, which deals with issues common to the banking, securities and insurance sectors. The second category are what can be called the issue-based fora and organizations. These include several committees based at the Bank for International Settlements (BIS), including the Committee on the Global Financial System, which monitors and analyses issues relating to financial markets and systems; the Committee on Payments and Market Infrastructures, which establishes and promotes global regulatory and oversight standards for payment, clearing, settlement; the Markets Committee, which monitors developments in financial markets; and the Central Bank Governance Forum, which examines issues related to central banks operation. This category also includes the Financial Action Task Force on Money Laundering (FATF), which develops standards and engages in monitoring of combating money laundering and terrorist financing measures; the International Association of Deposit Insurers (IADI) which promotes guidance and international cooperation on deposit insurance systems; the International Accounting Standards Board (IASB), which has set and reviews international accounting standards; and the International Federation of Accountants (IFAC), which reviews auditing standards. The third category includes the intergovernmental fora to the degree that they deal with financial matters. Although the G7, G8, G10 and G20 typically deal with a wide range of matters from security, economic cooperation, climate change, sustainability and development, they also regularly deal with, and largely set the political agenda, in respect to financial stability and financial regulation. The fourth category comprises the International Monetary Fund (IMF) and the Financial

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Stability Board (FSB), both of which play key roles in international financial stability. Although not involved in setting standards, it plays a role in respect to global financial stability, not only in respect to its lending programs but also in its surveillance and monitoring and assessment programs. The FSB was established after the G20 London summit in April 2009 and a successor to the Financial Stability Forum (FSF) and monitors and makes recommendations about the global financial system. Some literature refers to international banks such as the World Bank and various development banks as international financial institutions, however, their functions relate primarily to work development, which is beyond the scope of this book.

 volution of the US and the EU Global Financial E Markets Relationship The earliest form of international cooperation in the area of financial markets was the creation of the Bank for International Settlements (BIS). Formed in 1930 to take over from the Agent General for Reparations the collection, administration and distribution of annuities payable by Germany as reparations for WWI under the US-drafted Young Plan, the bank also aimed to facilitate central bank cooperation generally3. During the subsequent Great Depression, the US and European economies were the world’s largest economies and the most affected; hence they had the greatest need for technical cooperation on a range of issues like reserve management, foreign exchange transactions, international postal payments, gold deposits and swap facilities. The bank was overwhelmingly dominated by US and European powers from the outset, with the bank’s capital subscription guaranteed in equal parts by five central banks and two banking groups, namely the National Bank of Belgium, the Bank of England, the Bank of France, the Bank of Italy and the Reichsbank4. The two banking groups acted for the Bank of Japan and another represented three US banks. Essentially an informal club of central bankers5, it is the only IFI that existed prior to WWII. Given the US has never taken the board seats it is entitled to, it has tended to be a mostly European organization6. WW2 prompted a complete rethink about the international economy. With the global economy shattered, the aim of the Bretton Woods Agreement reached at an international 1944 summit held in New Hampshire was to help rebuild the postwar economy and promote international economic cooperation. Using the gold standard

 “BIS History”, Bank for International Settlements, Basel.  Auboin, Roger. 1955. “The Bank for International Settlements 1930 to 1955”, Essays in International Finance, No. 22, May, Princeton University, Princeton, New Jersey. 5  Helleiner, Eric (2010), “A Bretton Woods Moment? The 2007–2008 Crisis and the Future of Global Finance”, International Affairs, 86, Issue 3: 619–636. 6  Auboin, op. cit. 3 4

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to create a fixed currency exchange rate so as to stabilize the economy, and creating new global financial institutions, the 730 delegates who attended, as representatives of the 44 allied nations involved, created the foundation of a new financial architecture. The key aim was stability and for this reason the US and leading European industrialized nations were placed at the centre of the system. Bretton Woods created the World Bank and the International Monetary Fund (IMF) and also the General Agreement on Tariffs and Trade (GATT), an agreement that sought to reduce international trade barriers by eliminating or reducing quotas, tariffs, and subsidies. The US and European powers have been at the forefront of developing and expanding IFIs.

US-European Dominated Organisations Some organizations have been particularly US-dominated and others European. In the area of banking, an acceleration of the pace of European economic integration in the mid-1970s gave rise to intergovernmental cooperation in Europe that led to the emergence of the Basel Committee on Banking Supervision (BCBS). Formed in 1972 amid economic troubles arising from the collapse of the Bretton Woods exchange rate system, it has ever since been at the forefront of developing banking supervision and prudential standards worldwide. It arose from the need for greater cooperation between European monetary authorities in the then-European Economic Community on a number of issues, including the growth of the Eurodollar market. Its basis was entirely European. It formed as the Groupe de Contact, a group established in 1972 by officials in the banking supervisory authorities in the original six EEC countries7. It originally focused on European issues and, while it considered foreign matters such as the implications for Europe of the collapse of the National Bank of San Diego, there was no US representation in the group at all8. The events that eventually brought the Americans to the grouping were the collapse in June 1974 of West Germany’s Bankhaus Herstatt and the collapse just months later in October 1974 of the even larger Franklin National Bank of New York. Both had generated large losses from speculative positions in the foreign exchange market9. The Franklin National Bank of New York was New York’s largest bank at the time and the 23rd largest in the US. US and European banks had exposure to both collapses and these events raised questions about the quality of banking supervision and the need for even broader cooperation10. The implications were taken up in late 1974 by the G10 meeting of central bank governors. It comprised

7  Goodhart, Charles. 2011. The Basel Committee on Banking Supervision: A History of the Early Years 1974–1997, Cambridge University Press, New York: 12. 8  Goodhart, op. cit.: 21. 9  Ibid.: 33. 10  Bank for International Settlements, “A Brief History of the Basel Committee”, July 2013.

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representatives from mostly US and European economies at the time, notably the US, the UK, France, Italy, the Netherlands, Belgium, Germany and Sweden — but also the key US economic and political partners, Canada and Japan11. The Groupe de Contact was evolved into a committee comprised of prudential experts as well as supervisory representatives and broader representation to form the BCBS. Notable among these were British representatives, who led the initiatives to broaden the agenda beyond Eurodollar issues and headed the first new committee12. The new committee reported to the G10 governors, with all recommendations needing to be endorsed by them before being circulated13. Thus the very basis for the development of international banking supervision and prudential standards originated in Europe and involved the US later.

The US and Global Securities The US however has led in the International Organization of Securities Commissions (IOSCO). Formed in 1983 as part of the US Securities and Exchange Commission’s (SEC) drive to improve market enforcement in the US, it aimed to improve information exchange between securities regulators to investigate market abuses, especially insider trading, which became more important in an era of increasing cross-border trade. International cooperation with other regulators was a way to surmount obstacles as a result of international banking secrecy regulations14. The basis for the organization, however, was the Interamerican Conference of Securities Commissions and Similar Organisations that formed in 1974 in Caracas. Its sole purpose was to hold annual securities conferences15 but at its April 1983 conference it was evolved to bring securities regulators from outside the Americas, namely France, Indonesia, South Korea and the UK into the US-led association. A global organization with 226 members, it now develops, implements, and promotes adherence to internationally recognized standards for securities regulation. Its membership includes national securities commissions, securities regulators and other securities markets participants including stock exchanges, financial regional and international organizations. Other members include agencies or branches of government, some of which also have regulatory competence over securities markets as well as intergovernmental international organizations and other international standard-setting bodies, such as the IMF and the World Bank, and affiliate members  Goodhart, op. cit.: 21: 39.  Goodhart, op. cit: 21: 43. 13  Goodhart, op. cit: 21: 561. 14  The European Union’s Role in International Economic Fora; Paper 6, the IOSCO, DirectorateGeneral Internal Policies, European Parliament, July 2015 15  Camfferman, Kees and Zeff, Stephen. 2007. Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee 1973–2000, Oxford University Press, Oxford: 10. 11 12

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including self-regulatory organizations, stock exchanges, financial market infrastructures, investor protection funds etc16. IOSCO has played an important role in developing technical standards for the world’s securities markets, with its standards now used in more than 95% of the world’s securities markets17. Its foundation standards are the Objectives and Principles of Securities Regulation that in 1998 established regulatory guidelines  around securities regulation, auditor independence, corporate financial disclosure and transparency, conflicts of interest for financial analysts, and a code of conduct for credit rating agencies. Its standards have been revised several times. The US has led IOSCO ever since its foundation, a situation attributed to the size of its capital market and the US SEC’s size and reputation18. The SEC in contrast has broadly been at the forefront of building networks of financial regulators, constructing what Newman and Posner term a regulatory network “web” that involves dozens of international financial governance organizations and regulatory fora19. Prior to the financial crisis in 2009, IOSCO’s Technical Committee, which oversees the development of regulatory initiatives, included only the G7 countries, Australia, Hong Kong, Mexico, the Netherlands, Spain and Switzerland20. The EU in contrast has had more limited influence, restrained by its regulatory capacity in the areas of securities trading and the lack of a cohesive position on a number of issues amid competing member state preferences, like regulating hedge funds for example21. However, EU member states do have a strong presence on the IOSCO board as permanent members. Each authority has one vote and decisions are taken by consensus and given the size and influence of the US and the European markets, IOSCO decisions tend to reflect US and European preferences.

Other Bodies Other key international organizations have also been either European or US dominated. The International Accounting Standards Board (IASB), formed in 2001 from the previous International Accounting Standards Committee, develops best practice

 IOSCO Fact Sheet, November 2020.  “About IOSCO”, International Organization of Securities Commissions. 18  Camfferman, Kees and Zeff, Stephen. 2007. Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee 1973–2000, Oxford University Press, Oxford: 10. 19  Newman, Abraham L. and Posner, Elliot. 2012. “The International Regime for Financial Regulation: Transnational Feedbacks and Hegemonic Power”, paper delivered at Sciences Po, Paris, 20 March. 20  Helleiner, Eric. 2010. “What Role for the New FSB? The Politics of International Standards after the Crisis”, Global Policy, 1, Issue 3, October. 21  Quaglia, Lucia. 2014. “The Sources of European Union Influence in International Financial Regulatory Fora”, Journal of European Public Policy, 21, No. 3: 327–345. 16 17

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rules for accounting and was formed to effectively set up accounting standards alternatives to those used in the US in the wake of accounting scandals (as outlined in the earlier chapter). The IASB has also been Euro-American dominated22. Established in 1994, the International Association of Insurance Supervisors (IAIS) develops and assists in the implementation of principles and standards around insurance supervision and was established in the US. While the US has been a major shaper of insurance rules, the EU’s influence has grown notably since the 2000s, with a number of key topics on the IAIS regulatory agenda reflecting EU preferences23. The Committee on Payments and Market Infrastructures, based at the BIS in Switzerland and formed in 1990, develops standards and procedures for the banking payment, clearing and settlement system24. Its genesis has been largely European and arose from the need for payments system coordination amid European integration. Another key body is the Joint Forum established in 1996 under the aegis of the BCBS, IOSCO and the IAIS to coordinate issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.

A Defacto US-European Alliance The fact that the international system was created by Americans and European is significant. In a postwar environment in which the US was the world’s largest economy and played an instrumental role in funding and shaping the postwar IFIs, the US was in a position to establish and shape the institutional framework. In short it had first-mover advantage in several areas 25. It allowed them to create the rules. The EU of course was not formed until 1993 and as such did not exist as a supranational authority until then, although its predecessor, the EEU exercised considerable influence as part of the single market program in which rules in the internal European markets were harmonized. Nevertheless, individual European powers exercised considerable influence in the meantime. The dominant role of the US and European powers has been well discussed. The argument that this has created a club environment to drive the development of international standards that reflect their

 Chiti, Edoardo and Mattarella, Bernardo Giorgio (eds), Global Administrative Law and EU Administrative Law: Relationships, Legal Issues and Comparison, Springer, Berlin; Botzem, Sebastian. 2012. The Politics of Accounting Regulation: Organizing Transnational Standard Setting in Financial Reporting, Edgar Elgar, London. 23  Quaglia, 2014, JEPP, op. cit.: 327–345. 24  The Committee on Payments and Market Infrastructures was prior to 1 September 2014 called the Committee on Payment and Settlement Systems. 25  Posner, Elliot. 2010. “Sequence as Explanation: The International Politics of Accounting Standards”, Review of International Political Economy, 17, No. 4: 639–64. 22

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preferences is not new26. One of the dominant arguments has been the role of the US as a hegemonic power27, with Drezner for example arguing the basis for US and EU power was due to market size28. However, others have assessed the US role in the global system differently, finding that existing explanations for the creation of the global financial architecture usually overstate the role of the US29 and are at best incomplete30. More recently the rise of the EU as a dominant shaper of global standards and even rival to the US in the area of financial markets has been discussed thoroughly. There is considerable literature that attributes the EU’s rise as a global power in the standards-setting arena in the 1990s as the EU’s single market harmonization program gained pace. The EU’s rise has not been without its critics nor arguments that its influence is not up to the level the US yields in international governance. Quaglia argues that rather than the explanations based on market size, regulatory capacity and representation in international fora that often describe the US place in the international system, it has been the cohesiveness of the EU position that has given it greater analytical leverage31. The EU’s influence is not necessarily across the board32, with suggestions that its adoption of international financial accounting standards and the development of IAIS insurance standards rattled US dominance in this area33. Conversely it was said to have had low influence in the Basel III negotiations34. In addition, some Europeans states, for example Germany and France, may have greater influence than others or even the US itself. As part of an

 Drezner, Daniel. 2007. All Politics Is Global: Explaining International Regulatory Regimes. Princeton, NJ: Princeton University Press; Helleiner, Eric and Stefano Pagliari (2011), The end of an Era in International Financial Regulation: A Post-Crisis Research Agenda, International Organization, 2011, 65, issue 1: 169–200 27  Simmons, Beth. 2001. “The International Politics of Harmonization: The Case of Capital Market Regulation”, International Organization, 55: 589–620. 28  Drezner, Daniel W. 2007. All Politics is Global: Explaining International Regulatory Regimes, Princeton University Press, Princeton. 29  Mugge, Daniel. 2013. ‘Resilient neo-liberalism in European financial regulation’, in V. Schmidt and M. Thatcher (eds), Resilient Liberalism in Europe’s Political Economy, Cambridge University Press, Cambridge: 201–25. 30  Rawi Abdelal. 2009. Capital Rules. The Construction of Global Finance, Harvard University Press, Cambridge. 31  Quaglia, Lucia. 2014. The sources of European Union influence in international financial regulatory fora, Journal of European Public Policy, 21: 3: 329 32  Ibid. 33  Moloney, Niamh. 2017. The European Union in International Financial Governance, Journal of the Social Sciences, 3, No. 1, (January 2017): 139; Posner, Elliot (2010) ‘Sequence as explanation: The international politics of accounting standards’, Review of International Political Economy, 17: 4: 639–664 34  Quaglia, Lucia. 2014. The sources of European Union influence in international financial regulatory fora, Journal of European Public Policy, 21: 3: 339 26

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appreciation of the European contributions to global governance, some scholars have considered the role of key states such as France for example35. Considerable literature attributes the construction of the global rulemaking environment to non-state actors36 including industry actors37. When networks of US and European regulators began constructing rules in the postwar period in successive IFIs such as the Basel Committee on Banking Supervision, IOSCO and IAIS among others, they brought with them preferences, norms and values. The liberalization of financial markets was driven by US multinational firms and financial investors38, which in the process of globalizing financial markets, created a system imbued with predominantly neoliberal preferences39. While some scholars saw such actors as independent and not agents for exercising state preferences40, others rejected this suggestion and saw states as firmly in control41. This view, considered in governmentality-­related literature, suggests that the ascendency of non-state actors doesn’t so much represent a transfer of power from state to non-state actors, but is an expression of a changing rationality of government.42 This view sees the activities of both public and private actors as being coordinated through formal and informal rules in a way that nevertheless achieves common or public goals. Other scholars have adopted a kind of hybrid position. Drezner argues that while power comes from the size of a government’s internal market, government preferences in respect to regulatory standards are nevertheless shaped by domestic considerations43.

 Rawi Abdelal. 2009. Capital Rules. The Construction of Global Finance, Harvard University Press, Cambridge. 36  Singer, David Andrew. 2004. Capital Rules: The Domestic Politics of International Regulatory Harmonization, International Organization, 58, No. 3: 531–565; Ole Jacob Sending and Iver B.  Neumann. 2006. Governance to Governmentality: Analyzing NGOs, States, and Power, International Studies Quarterly, 50, No. 3: 651–672 37  Underhill, Geoffrey R. D. and Zhang, Xiaoke. 2008. Setting the rules: private power, political underpinnings, and legitimacy in global monetary and financial governance, International Affairs, 84, 3: 535–554; Helleiner, Eric. 1994. States and the re-emergence of global finance: From Bretton Woods to the 1990s, Cornell University Press, Ithaca. 38  Helleiner, Eric. 1994. States and the re-emergence of global finance: From Bretton Woods to the 1990s, Cornell University Press, Ithaca. 39  Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes, Princeton University Press 40  Singer, David Andrew. 2007. Regulating Capital: Setting Standards for the International Financial System Series, Cornell University Press, Ithaca, London. 41  Oatley, Thomas and Nabors, Robert. 1998. Redistributive Cooperation: Market Failure, Wealth Transfers, and the Basle Accord, International Organization, Vol. 52, Issue 1: 35–54; Kapstein, Ethan B. (1994), Governing the Global Economy: International Finance and the State, Harvard University Press, Cambridge Mass. 42  Sending, Ole Jacob and Neumann, Iver B. 2006. Governance to Governmentality: Analyzing NGOs, States, and Power, International Studies Quarterly, 50, No. 3: 651–672 43  Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes, Princeton University Press. 35

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In any case, there is little disagreement with the proposition that the system of global governance had been transformed radically in the postwar period, with states incorporated into a broader international system of governance that is both created by states and shapes states, or what Cerny refers to as a plural and composite or “plurilateral” structure44. Several have labelled this form of governance, as it also applied to the EU, as “experimental”; it involves the setting of revisable framework goals, the encouragement of multiple types of rulemaking, measures to gauge their achievement, and  reporting and peer evaluation to determine what works best45. After the global financial crisis, considerable attention was given to the surge in post-crisis financial regulatory reform in the transatlantic market and in the global rule-making environment. However, much less attention has been given to the way in which US and EU cooperation on financial issues at intergovernmental, transgovernmental and in multilateral fora have affected outcomes in the global financial system.

A Deliberative Alliance US and EU cooperation on financial matters has an effect on global financial governance by default; that is, what the US and EU decide together has a consequential effect on the nature and substance of the international financial rule-making environment naturally give their respective weight in the financial markets space. However, this alliance is also partly deliberative. It is an alliance in which the US and the EU have intentionally entered so as to achieve respective and, after negotiation, common goals. Each successive intergovernmental agreement in the 1990s and since has either implicitly or explicitly stated that each party (the US and EU) would cooperate in multilateral fora. In the Transatlantic Declaration in 1990, the US and the-then European Community and its Member States pledged to jointly reinforce the role of the United Nations and other international organizations and to pursue policies “in a framework of international stability”. They would promote market principles, reject protectionism and expand, strengthen and further open the multilateral trading system, and “seek close cooperation in appropriate international bodies46. In the New Transatlantic Agenda in 1995, among other provisions which asserted close cooperation in international fora, the US and the EU agreed to “work with  Cerny, Philip G. 1995. Globalization and the Changing Logic of Collective Action, International Organization, 49, No. 4: 596. 45  Sabel, Charles, Zeitlin, Jonathan. 2010. “Experimentalist Governance in the European Union: Towards a New Architecture” in David Levi-Faur (ed) The Oxford Handbook of Governance, Oxford University Press, Oxford; Campbell-Verduyn, M. and Porter, T. (2014) ‘Experimentalism in European Union and global financial governance: interactions, contrasts, and implications’, Journal of European Public Policy, 21(3). 46  “Transatlantic Declaration on EC-US Relations”. 1990. European Commission 44

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others bilaterally, at the United Nations and in other multilateral fora … we are determined to reinforce our political and economic partnership as a powerful force for good in the world”.47 Perhaps the firmest assertion is contained in the Transatlantic Economic partnership in 1998 where both sides agreed on the “coordination of EU and US positions in international organizations”48. The claims of the existence of a “club governance” in which the US and the EU dominate is no accident. It is a result of a purposeful and concerted effort to maintain both mutual and respective interests in the global financial rulemaking environment.

Control and Management of IFIs There are several ways in which the US and key European states, as well as the EU, have been able to pursue their preferences and maintain effective control in the system of global financial governance. The first of these is through direct management and voting in key IFIs. Ever since its beginning, the BIS has been dominated by European and US leadership. At the BIS there are six key committees. Notably, the Basel Committee on Banking Supervision develops global regulatory standards for banks and seeks to strengthen micro- and macroprudential supervision. Founded in 1974 at the behest of the Governors of G10 members’ central banks and the Governor of the Swiss National Bank following the financial impact of the collapse of Germany’s Herstatt Bank, the aim was to contribute to safeguarding the stability of the international banking system. Its initial members were the central banks of the G10 members, Switzerland and Spain, thus giving it an overwhelming European leadership, until 2009 when it was expanded by a G20 decision to add 12 G20 members that were not already represented in it, as well as the ECB49. It expanded again in 2014 and now has 45 members from 28 jurisdictions. BCBS membership is tightly guarded and is reviewed periodically. After consulting the committee, the BCBS Chair may invite other organizations to become BCBS observers. The committee states that “in accepting new members, due regard will be given to the importance of their national banking sectors to international financial stability”50. Of note is that every one of its chairs since its creation have either been European (nine times) or American (twice) (Table 7.1). The BCBS is overseen by the Group of Governors and Heads of Supervision (GHOS). It itself comprises the central bank governors and non-central bank heads of supervision from BCBS member jurisdictions. The BCBS reports to the GHOS

 “The New Transatlantic Agenda”. 1995. European Commission  “Transatlantic Economic Partnership”. 1998. European Commission 49  “History of the Basel Committee and its Membership”, Bank for International Settlements, March 2001. 50  “Basel Committee Charter”, Bank for International Settlements, 5 June 2018. 47 48

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Table 7.1  Chairs of the Basel Committee on Banking Supervision (BCSC) 2019-present 2011–19 2006–11 2003–06 1998–03 1997–98 1993–97 1991–93 1988–91 1977–88 1974–77

Pablo Hernández de Cos, Governor of the Bank of Spain Stefan Ingves, Governor, Sveriges Riksbank Nout Wellink, President, Netherlands Bank Jaime Caruana, Governor, Bank of Spain William J McDonough, President, Federal Reserve Bank of New York Tom de Swaan, Executive Director, Netherlands Bank Tommaso Padoa-Schioppa, Deputy Director General, Bank of Italy E Gerald Corrigan, President, Federal Reserve Bank of New York Huib J Muller, Executive Director, Netherlands Bank Peter Cooke, Associate Director, Bank of England Sir George Blunden, Executive Director, Bank of England

and seeks its endorsement for major decisions including changes to its charter, general direction for its work programme, and appointment of the chair. It also makes recommendations to GHOS for any changes to its membership and it is the GHOS that ultimately decides membership. Its own composition is also tightly guarded. However, the Group of Central Bank Governors and Heads of Supervision is chaired by François Villeroy de Galhau, Governor of the Bank of France. Europeans and Americans also dominate other key BIS committees, the Committee on the Global Financial System, which monitors and analyses issues relating to financial markets and systems; the CPMI, which establishes and promotes global regulatory and oversight standards for payment, clearing, settlement; the Markets Committee, which monitors developments in financial markets; and the Central Bank Governance Forum, which examines issues related to central banks operation. There is also the Irving Fisher Committee on Central Bank Statistics, whose aim to collect banking statistics and share key information. The top job in the IMF also belongs to Europe. The US and Europe have long maintained an unofficial claim over the IMF’s top job of managing director as well as the top position in the World Bank. As part of an unwritten agreement between the US and Europe, a European has always headed the IMF and an American the World Bank. In the IMF for example, all IMF managing directors since its establishment have been from a European state, including Kristalina Georgieva, from Bulgaria, the current managing director the time of writing. In fact, all have been from an EU member state (or its predecessor the EEC) with two exceptions, those being Sweden’s Ivar Rooth was head from August 1951 to October 1956 and Sweden’s Per Jacobsson from November 1956 to May 1963. Sweden only joined the EU in 199551. Europe’s claim over the top position is not outlined in any of the

51

 “IMF Managing Directors”, International Monetary Fund.

The Power of Hegemony in Shaping Convergence

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IMF’s articles or bylaws but is instead a “gentlemen’s agreement” established when the institution was set up52. For a discussion of voting control in the IMF, see the subsequent chapter. US and EU dominance is not only pronounced in IFIs where the rulemaking capability tends be to comprise national regulators. US and EU dominance also extends to intergovernmental fora like the G20. This is discussed in Chap. 4.

The Power of Hegemony in Shaping Convergence The second is simply by market size. Larger markets can have greater sway in shaping standards convergence because smaller states are eager to access their markets and willing to accommodate their preference and because large markets are better able to threaten others with economic coercion53. Quaglia argues there are two necessary and complementary conditions for a jurisdiction’s ability to influence international regulatory convergence in finance: a large market and a strong regulatory capacity54. These the US has in abundance. The EU’s influence in contrast has been somewhat restrained up until the 2000s, with the EU in the process of building up its regulatory capacity and legal competence in several areas of financial services and conflicting member state preferences undermining a cohesive EU position. Also aiding both the US and the EU in this respect are two further important factors: powerful private actors and expertise. Both possess considerably large and globally powerful private sectors which have strengthened in recent decades55. Private actors are able to organize themselves to the exclusion of others (using the club model via an agent-centered approach)56. They also have the benefits of possessing considerable expertise in what are highly specialized and technical areas of the economy. Scholars have noted how specialist knowledge can allow private actors to acquire authority functions57 and can elevate certain decision-making beyond the grasp of many public authorities and politicians58. This allows private

 Keating, Joshua. 2011. “Why is the IMF Chief Always a European?”, Foreign Policy, 18 May.  Drezner, Daniel.2007. All Politics is Global: Explaining International Regulatory Regimes, Cambridge University Press, Cambridge, UK. 54  Quaglia, Lucia. 2014. “The European Union and Global Financial Regulation”, Oxford Scholarship Online, August. 55  Underhill, Geoffrey R. D. and Zhang, Xiaoke. 2008. Setting the Rules: Private Power, Political Underpinnings, and Legitimacy in Global Monetary and Financial Governance, International Affairs, 84: 3: 535–554. 56  Tsingou, Eleni. 2014. Club Governance and the Making of Global Financial Rules, Review of International Political Economy, T&D Online, 19 March. 57  Ibid. 58  Lindblom, Charles E. 1977. Politics and Markets, Basic Books, New York; Lindvall, J. 2009. “The Real but Limited Influence of Expert Ideas”, World Politics, 61(4): 703–30. 52 53

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actors to achieve legitimacy, allowing them in many cases to “write their own scripts” in the form of industry codes and best practice models59.

Agenda-Setting The third strategy to maintain control is a strategy to seize first mover advantage as part of an effort to set the agenda. A number of routes have been described by which issues are progressed through a policy process, including by non-government groups, government insiders and governments themselves60. Many of the precipitating events for the mobilization of an issue are what Birkland describe as “focusing events”. These are events that are “sudden, relatively uncommon, can be reasonably defined as harmful or revealing the possibility of potentially greater future harms”. A financial crisis of the magnitude seen in 2007–09 would fit this definition61. The early stages of a policy process are inherently unstable and can “cycle” from one choice to another62. Shepsle examined the agenda-setting power of US Congressional committees for example and argued that certain actors can stabilize the process by controlling it63. This control also gave those actors significant power; in the case of US Congressional committees for example representatives, as beneficiaries of their committee’s agenda-setting ability were able to enjoy disproportionate clout in areas of interest to their constituents and were able to be viewed and become experts in a given field. Such findings have been made in relation to the EU as well, with Pollack arguing that the choice of actor as the agenda setter also “matters” by giving greater power over outcomes to those involved64. In respect to the international financial system, a strategy to set the agenda manifests in the use of the G7-G8 and G20 as fora. Typically, G7-G8 meetings are held before a G20 meeting in an effort to set the agenda in a smaller better controlled forum before taking it to a broader more potentially unstable one, with divergent political positions. This was the case in the early days of intensified efforts to coordinate an international solution to the global financial crisis in 2008–09. As discussed in Chap. 4, a G7 meeting was held at the White House in Washington with largely US and European finance ministers and central bank governors present, as  Tsingou, Eleni. 2003. “Transnational policy communities and financial governance: the role of private actors in derivatives regulation”, CSGR Working Paper No. 111/03 January 60  Cobb, Roger; Jeannie-Keith, Ross; and Ross, Marc Howard (1976), “Agenda Building as a Comparative Political Process, American Political Science Review, 70, No. 1: 126–138. 61  Birkland, Thomas A. 1998. “Focusing Events, Mobilization, and Agenda Setting”, Journal of Public Policy, 18, Issue 1, January: 53–74. 62  Pollack, Mark A. 1997. “Delegation, Agency, and Agenda Setting in the European Community, International Organization, 51, No. 1, Winter: 99–134. 63  Shepsle, Kenneth. 1987. “The Institutional Foundations of Committee Power”, American Political Science Review, 81; Ibid. 64  Pollack, op. cit.: 99–134. 59

A Strategy of Active Engagement

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well as representatives of the EU itself and the IMF and FSF. These included representatives of US, France, Germany, the UK, Italy, Canada and Japan; as well as Prime Minister Jean-Claude Junker of Luxembourg, who was the President of the Eurogroup of countries; IMF Managing Director Dominique Strauss-Kahn; President Zoellick of the World Bank; and FSF Chairman Mario Draghi. Only hours later a meeting of G20 Finance Ministers and Central Bank Governors took place which invariably endorsed the decisions taken by the G7 just hours earlier. The G7 meeting was effectively a mechanism by which US and European preferences could be integrated into a broader international effort involving G20 countries, which could assist with funding financial stability efforts. Also as discussed in Chap. 4, EU leaders the following day followed the same strategy in holding a Eurozone leaders’ meeting and developing a detailed coordinated action plan entitled “Declaration on a Concerted European Action Plan of the Euro Area Countries” just prior to a full EU Summit just days later on 15 and 16 October involving all EU leaders at which earlier decisions were endorsed65.

A Strategy of Active Engagement The fourth is a strategy of active engagement with key stakeholders as part of efforts to set and shape the discussion and thereby shape the political and regulatory agenda. US regulators have for some time actively sought to pursue US regulatory interests and the interests of US firms abroad in international multilateral fora. The SEC’s international reach is promoted through the Office of International Affairs (OIA) whose goal has been to improve domestic investor protection and facilitate cross-­ border securities transactions through international regulatory and enforcement cooperation and promoting the adoption of high regulatory standards worldwide66. For example, in the early 1990s, the SEC began initiating cooperative agreements on financial markets regulatory issues with foreign counterparts in Asia, Latin America and Europe67 to improve enforcement cooperation with its foreign counterparts. The SEC formed 29 enforcement agreements between 1988 and 2002 with foreign regulators, including the European Commission in September 1991 and IOSCO in May 2002. These typically provided for exchange of information. Eleven of these were European countries. The non-binding agreements typically involved regular consultations, advance notifications of regulatory changes that might affect

 Council of Ministers (2008) “Declaration on a Concerted European Action Plan of the Euro Area Countries”, 12 October. 66  “Advancing the SEC’s Mission through International Organizations”, Securities and Exchange Commission. 67  Annual Report 2002, Securities and Exchange Commission, The Office of International Affairs, Washington DC 65

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each other’s firms or changes in the operating environment, operations, management, or systems and controls68. In the 2000s, the OIA extended its engagement with regulators abroad to supervisory cooperative agreements, dealing with issues of investor protection, fostering market integrity, and maintaining confidence and systemic stability. The OIA’s program is now very extensive, encompassing international enforcement assistance, international regulatory policy, international supervisory cooperation, international technical assistance, cooperative arrangements with foreign regulators, international training and provision of policy materials. The SEC signed 16 agreements with foreign markets supervisors between 1995 and 2020, including with the European Banking Authority in 2017. It also signed dozens of agreements in data protection, asset management and technical assistance in the 1990s and 2000s69. The office’s mission obviously encompasses more than just foreign regulators but also the key international standards organizations, including IOSCO, the FSB, the BIS-based Joint Forum, the IFRS Foundation Monitoring Board (that oversees the International Accounting Standards Board), as well the IOSCO-based Monitoring Group that represents the International Federation of Accountants70. However, like many US foreign programs, enthusiasm has waned at times and been reinvigorated at others. The Bush Administration was somewhat ambivalent towards global financial rules, but its interest in IOSCO intensified significantly after the terrorist attacks of 11 September 2001, when US regulators sought to extend their involvement in a range of multilateral fora as part of their efforts to tackle law enforcement at home. One of the outcomes was IOSCO’s primary instrument for cooperation: a multilateral MOU between various global regulators formed after 9/11 to improve cooperation and the exchange of information on cross-border regulatory violations. The MOU signed in 2002 committed regulators to enforce strict standards on banks, brokerages and other securities firms operating in their markets. It further committed regulators to compel operators to provide certain information, share information, and prohibit domestic banking secrecy laws71. The SEC, which was instrumental in its formation and was among the first signatories, saw the MOU as “critical to combating violations of securities and derivatives laws”72. Such alterations in priorities have been attributed to both the priorities

 See as examples the Memoranda of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to Market Oversight and the Supervision of Financial Services Firms signed with Germany, April 26, 2007, and another with the UK Bank of England, March 14, 2006. 69  “Cooperative Arrangements with Foreign Regulators”, US Securities and Exchange Commission. 70  The other international organizations with which the SEC maintains an active engagement are the Financial Action Task Force (FATF), the Organization for Economic Cooperation and Development (OECD) and the Council of Securities Regulators of the Americas (COSRA). 71  International Organization of Securities Commissions. 2002. “Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information”, May. 72  Securities and Exchange Commission. 2003. “SEC Announces IOSCO Unveiling of Multilateral Agreement on Enforcement Cooperation”, press release, 31 October. 68

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of regulators themselves as well as the priorities of legislators. Examining the development of the Basel Accords, Kapstein argues that minimum capital standards improved financial system stability and therefore were in regulators’ collective interests73. At the same time, Singer argues, regulators simply reflect legislator priorities (as part of a principal-agent relationship) and when they act against the interests of those legislators, the latter step in to exert control and affect policy change74. In the early 2000s, the SEC also began regular dialogues with foreign counterparts, with the US-EU Financial Markets Regulatory Dialogue launched in 2002 the first of them. This dialogue, discussed in an earlier chapter, included representatives of the US Treasury, SEC, Commodity Futures Trading Commission and the Federal Reserve Board and the European Commission. These aimed to identify SEC proposals that conflicted with foreign laws and foreign stock exchange requirements as well as cooperate with those partners to create a regulatory environment conducive for US firms75. Similarly, the EU has established regular dialogues on financial regulation with key economic partners, in particular the US, Japan, China, Canada, India, Russia and Brazil. These provide opportunities for the US to influence EU policymaking, as part of an effort to manage the “spillover” effects of regulatory action in one jurisdiction, such as the EU, to the US76. They also have the effect of diffusing US private firm and government preferences, shape regulatory priorities and gain leverage by offering technical assistance in respect to US market access as part of the discussion and/or negotiation process. The strategy of foreign engagement fundamentally aims to preserve US market integrity interests through enforcement, best practice, information exchange and technical assistance. At the same time, the EU also has formed regular dialogues on financial regulation with key economic partners, in particular the US, Japan, Switzerland, China, Canada, India, Russia and Brazil77. As with the US, these typically form part of a broader framework of cooperation under agreements such as the EU-Japan Economic Partnership Agreement.

Norms, Values, Standards and Principles Given the significant place of the US and the EU in the international market, international engagement also has the effect of diffusing norms, values, and ultimately domestic preferences into the system of international financial governance.  Kapstein, Ethan. 1989. “Resolving the Regulator’s Dilemma: International Coordination of Banking Regulations”, International Organization, 43, No. 2: 323–47. 74  Singer, David Andrew. 2004. “Capital Rules: The Domestic Politics of International Regulatory Harmonization”, International Organization, 58: 531–565. 75  Securities and Exchange Commission. 2002. The Office of International Affairs, Annual Report 2002, Washington DC. 76  Ibid. 77  “Regulatory dialogues and high-level meetings on financial services regulation”, European Commission, viewed 2 February 2021. 73

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This forms a part of the above strategy, given that such norms, values, standards and principles are themselves manifestations of US and European preferences. Examples include neoliberal values of market-oriented reform policies78, the principle of light-­ touch regulation79, the idea that more open national markets would provide facilitate adjustment and durable development80, and Anglo-American understandings of how financial systems should work generally81. These have been fundamental to US-EU cooperation on regulatory cooperation since the milestone Transatlantic Declaration on EC-US Relations in 1990. Both sides to the agreement committed to “promote market principles”82. The Transatlantic Economic Partnership (TEP) signed after the US-EU Summit in London in May 1998 further consolidated neoliberal preferences by seeking “additional liberalisation” in sectors and areas of common interest for EU and US services suppliers, seeking “the highest possible level of liberalisation” in international multilateral trade fora and removing barriers to trade through regulatory cooperation83. These agreements formed part of what Pollack and Shaffer refer to as the broader “neoliberal project of transatlantic product and financial market integration”84. The EU and the US have shaped the international regulatory environment not only through key cooperative alliances such as that which exists between the US and the EU, but also by extending their own laws to third jurisdictions, through extraterritoriality provisions for example (such as the Dodd-Frank Act in the US)85. Furthermore, such preferences have been uploaded to international fora and standards. Underhill et al. have argued that the international context particularly is dominated by policy communities, which have a “strong preference” for a “market-orientated financial architecture” 86. Such a system of preferences has for example underpinned the G20 process from the start87. These are perpetuated by  Boas, Taylor C., Gans-Morse, Jordan. 2009. “Neoliberalism: From New Liberal Philosophy to Anti-Liberal Slogan”, Studies in Comparative International Development, 44 (2): 137–61. 79  Pellegrina, Lucia Dalla, Masciandaro, Donato. 2013. “Good Bye Light Touch? Macroeconomic Resilience, Banking Regulation and Institutions”, Risk Governance and Control: Financial Markets & Institutions, 3, Issue 1, 18 80  Pauly, Louis W. 2009. “The Old and the New Politics of International Financial Stability”, Journal of Common Market Studies, 47. Number 5: 964. 81  Rawi Abdelal. 2009. Capital Rules. The Construction of Global Finance, Harvard University Press, Cambridge. 82  “Transatlantic Declaration on EC-US Relations”. 1990. European Commission 83  US Mission to the EU, op. cit. 84  Pollack, Mark A. and Shaffer, Gregory. 2001. Transatlantic Governance in the Global Economy, Rowman & Littlefield, Maryland US: 4. 85  Quaglia, Lucia. 2014. Oxford Scholarship Online, op. cit.; Posner, Elliot and Véron, Nicholas. 2010. “The EU and Financial Regulation: Power Without Purpose?”, Journal of European Public Policy, 17, No. 3: 400–15. 86  Underhill, Geoffrey, Blom, Jasper, Mugge, Daniel. 2010. “Global Financial Integration Thirty Years on: From Reform to Crisis”, Cambridge University Press, Cambridge: 13 87  Helleiner, Eric. 2010. “The Financial Stability Board and International Standards”, The Centre for International Governance Innovation, Ontario, Canada, CIGI G20 Papers, No. 1, June. 78

Status Quo Push-Back

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exerting “atmospheric influence” and through influence the “medium- or short-term agenda”88. Neoliberal regulatory preferences that underpin US and EU interests can be found in what Newman and Posner refer to as a broader international financial governance “template” of international financial governance89. One of the most prominent examples is of course the so-called “Washington Consensus” set of values that were largely conceived in Washington90. These were created by, as originally stated, the US Executive, and members of Congress who take an interest in Latin America, and think tanks concerned with economic policy, as well as top decision-makers at the IMF and the World Bank, the Inter-American Development Bank. These actors had developed a system where loans, particularly to Latin America at the time, were tied to conditionality. The idea that international institutions such as the IMF are not entirely independent but instead imbued with a particular set of ideological assumptions, policy ideas and sectional and national interests is not new91. These conditions required the implementation prudent macroeconomic policies, outward orientation, and free-market capitalism92. The development and adoption of financial standards by larger nations tends to reinforce the need for smaller states to adopt them as well.

Status Quo Push-Back In recent decades, other countries have sought to take the initiative to create alternative IFIs but with only some success. Resistance from the US and existing IFIs have thwarted efforts to alter the landscape. The Japanese government for instance proposed an Asian Monetary Fund (AMF) during the 1997 Asian Financial Crisis at the  Tsingou, Eleni. 2003. “Transnational Policy Communities and Financial Governance: The Role of Private Actors in Derivatives Regulation”, CSGR Working Paper No. 111/03 January, CORE, Milton Keynes. 89  Newman, Abraham L. and Posner, Elliot. 2012. “The International Regime for Financial Regulation: Transnational Feedbacks and Hegemonic Power”, paper delivered at Sciences Po, Paris, 20 March. 90  Williamson, John. 1990. “Introduction”, in J. Williamson (ed.) Latin American Adjustment: How Much Has Happened? Washington, DC: Institute for International Economics: 1–3; Williamson, John. 1990. ‘What Washington Means by Policy Reform’, in J. Williamson (ed.) Latin American Adjustment: How Much Has Happened? Washington, DC: Institute for International Economics: 5–20. 91  Bhagwati, Jagdish. 1998. “The Capital Myth”, Foreign Affairs, 77 (3): 7–12; Woods, Ngaire. 2003. “The United States and the International Financial Institutions: Power and Influence Within the World Bank and the IMF, in Rosemary Foot, Neil MacFarlane and Michael Mastanduno (eds) (2003) US Hegemony and International Organizations, Oxford University Press, New York. 92  Williamson, John. 1990. ‘Introduction’, in J. Williamson (ed.) Latin American Adjustment: How Much Has Happened? Washington, DC: Institute for International Economics: 1–3; Williamson, John. 1990. ‘What Washington Means by Policy Reform’, in J. Williamson (ed.) Latin American Adjustment: How Much Has Happened? Washington, DC: Institute for International Economics: 5–20. 88

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G7-IMF meetings in Hong Kong. While it was rejected by other Asian countries including China, it was the US that effectively vetoed the idea. Japan proposed that it be capitalized to the amount of $100 billion, with half of its reserves coming from Japan and the remaining $50 billion from other regional powers, such as Taiwan, Singapore, Hong Kong, and China. Several other Asian nations opposed it too. China was naturally hostile to any action that improved Japan’s regional standing and was worried about new US-Japan security guidelines in 1997. But moreover the idea was strongly opposed by the US and the IMF. Both argued that an AMF would allow countries to access financial bailouts without undergoing structural reforms. The US Treasury was cautious about an AMF that would inhibit the ability of the US Treasury to force adjustments through the IMF in Asia and impede the liberalization of trade and finance93. There were similar calls to establish a European Monetary Fund in the midst of the Euro Crisis in 2009–10. The idea was endorsed by the European Commission94 and leading EU political leaders. German Chancellor Angela Merkel told the BBC “we want to be able to resolve our problems in the future without the IMF”95. Offering an explanation for the political resistance, the article suggested it could “not be overstated how much European officials fear an IMF bail-out of Greece or other countries. It would not just be a humiliation; it would be regarded as a verdict of no-confidence in the eurozone”. It was suggested that the IMF was seen as “too Washington” given that the US holds veto power; even French President Nicolas Sarkozy was reluctant to let the IMF bail out EU states, given that IMF head Dominique Strauss-Kahn was seen as a credible candidate to run against him for the French presidency96. However, none of this mattered, given the idea was firmly rejected by the US. The political machinations on the issue are discussed in the subsequent chapter. Instead, the support within the European Commission and at political level led to the creation of the European Stability Mechanism (ESM) designed to provide longer-term financial support to EU states countries in need of economic aid.

The Enforcement of Global Rules The dominance of the US and the EU in the domain of international financial rulemaking has implications for the global international system as well as individual countries. It means they effectively extend a level of influence at least and defacto control at best over the rules of banking and finance in the world’s major

 Narine, Shaun. 2003. The Idea of an “Asian Monetary Fund”: The Problems of Financial Institutionalism in the Asia-Pacific, Asian Perspective, 27, No. 2: 65–103. 94  “Commission backs European Monetary Fund”, Politico, March 8, 2010 95  Hewitt, Gavin, “A European Monetary Fund, BBC News, 9 March 2010 96  “Why is Germany talking about a European Monetary Fund?”, The Economist, 9 March 2010 93

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industrialized economies. To do this requires a system of enforcement. Even though the G20 has effectively become the global financial governance steering committee, the adoption of standards developed by the various standards bodies under its aegis — IOSCO, BCBS, IAIS and IASB among others — is strictly voluntary. All these bodies’ standards are non-binding and adoption in various countries including the US and the EU depends ultimately on intergovernmental will and cooperation. There may be a system of global governance but there is no government. Indeed the whole international financial regulatory landscape is a complex body of rules “written and unwritten” that govern entry and operations of firms across borders”97. Unlike areas such as trade, financial regulation is not particularly multilateral in nature and, unlike international standards such as the law of the sea, legally binding conventions that govern international finance are rare98. The enforcement of existing obligations is perhaps the biggest challenge of all in many areas of global governance at the best of times99. So the enforcement of compliance with financial governance rules in an area of governance mostly characterized by voluntary standards and intergovernmental cooperation and needs to be effected by other mechanisms. The key tools of control include the many assessment programs, monitoring and surveillance programs, reporting mechanisms, country reports and assessment reports regularly issued by IFIs as part of routine practice. Examples include the FATF’s financial surveillance guidelines, the World Bank’s Country Policy and Institutional Assessment, the IMF’s Financial Sector Assessment Program (FSAP), the Basel III regulatory consistency assessment programme and even the OECD’s Multi-dimensional Country Reviews. The IMF FSAP for example is a comprehensive and in-depth analysis of a country’s financial sector. Aiming to assess stability, IMF experts examine the resilience of the banking and non-bank financial sectors; conduct stress tests and analyze systemic risks, including linkages among banks and nonbanks and domestic and cross-border spillovers; examine microprudential and macroprudential frameworks; review the quality of bank and nonbank supervision and financial market infrastructure oversight; and evaluate the ability of central banks, regulators and supervisors, policymakers, backstops and financial safety nets to respond effectively in case of systemic stress. They also conduct development assessments, in which institutions, markets, infrastructure, and inclusiveness are examined, along with the quality of the legal framework and of payments and settlements systems among others100. Similarly, the FSB’s peer reviews which  started in 2010 consist of thematic reviews and country reviews. FSB peer reviews focus on the implementation and effectiveness of international financial standards developed by standard-setting  Newman, Posner, op. cit.  Simmons, Beth. 2001. “The International Politics of Harmonization: The Case of Capital Market Regulation”, International Organization, 55: 589–620. 99  Weiss, Thomas G. 2013. “What is Global Governance?”, in Thomas G Weiss (ed), Global Governance: Why? What? Wither?, Polity, Cambridge Mass: 58. 100  “Financial Sector Assessment Program (FSAP)”, International Monetary Fund, June 3, 2019 97 98

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bodies (SSBs) and of policies agreed within the FSB101. Such programs are designed to involve countries in a program of financial and economic stability. They also have the effect of naming and shaming recalcitrant states and encouraging them to remain in a system of governance effectively established by the G20102.

Coercion as Enforcement Several scholars have examined the application of certain rules such as global money laundering rules, with Drezner criticizing “club IGOs” (international governmental organization) that have allowed intergovernmental fora such as the G7 to “cajole, coerce, and enforce a global anti-money-laundering standard into existence”103. Other scholars have similarly argued that anti-money laundering measures have been designed around creating coercive incentives104. Even countries that are not in the G20 are inextricably involved in the financial rules. In 2019, Pakistan was at risk of being blacklisted by the FATF over its failure to fully comply with anti-money laundering and anti-terrorist financing rules. If it was placed on the blacklist, the FATF could urge international banks and financial institutions to sever ties with Pakistani entities. In areas such as banking, failure to adopt Basel capital standards can have huge consequences for states. A poor assessment can result in a country receiving a ratings downgrade which can affect  a country’s interest rates, its balance sheet and currency and equities markets. In areas such as securities, the consequences can also be grave. The IOSCO standards in respect to clearing, settlement and reporting arrangements, OTC derivative market participants and activities and credit ratings agencies among others have also been incorporated into domestic legislation around the world. States can also be punished in the market for failing to fall into line. For market participants, failure to abide by global rules imported into domestic legislation can have serious consequences. National regulatory authorities frequently exert considerable “compliance pressure” on industry to implement global standards as part of the drive for “best practice”105. Financial firms at best can be fined, reprimanded or subjected to costly regulatory investigations by authorities.  “Peer Reviews”, Financial Stability Board, Basel  Interview conducted by author with senior adviser at the International Monetary Fund, Brussels, 14 February 2014 103  Drezner, Daniel. 2007. All Politics is Global: Explaining International Regulatory Regimes, Princeton University Press, Princeton NJ. 104  Tsingou, Eleni. 2010. Global Financial Governance and the Developing Anti-Money Laundering Regime: What Lessons for International Political Economy? International Politics, 47, 6: 617–637; Rainer Hülsse. 2007. Creating Demand for Global Governance: The Making of a Global Moneylaundering Problem”, Global Society, 21: 2: 155–178; J. C. Sharman. 2008. Power and Discourse in Policy Diffusion: Anti-Money Laundering in Developing States, International Studies Quarterly, 52, No. 3: 635–6. 105  Chey, Hyoung-Kyu, op. cit.: 295–311. 101 102

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Market forces can also play a significant role in encouraging or requiring private financial institutions to embrace international financial standards by penalizing those institutions that do not use them106. For public companies, regulatory reprobation can lead to severe punishment by the market. In some cases, financial services licenses can be at risk and at worst criminal penalties can apply, particularly in respect to failure to abide by anti-money laundering and terrorist legislation. The market reaction to such developments can also be severe, with companies facing credit ratings downgrades, stock selloffs in the market, and shareholder revolt. Effectively the system of global financial governance works by exporting rules into domestic systems, thereby creating powerful incentives to market participants to comply with rules under the threat of market or regulatory punishment. Equally the system punishes states that fail to keep to the standards set by IFIs. Essentially, the process follows that once a problem has been placed on the agenda either at intergovernmental level by political actors or transgovernmental level by regulatory actors, it is transposed to the multilateral environment via state representation in key IFIs or fora.

Problematization Some scholars have argued that such actors frequently try to “problematize” the issue they attempt to regulate, for example by constructing the issue as a global problem that requires global rules in order to be solved107. This could be particularly useful in settings such as the G20. G20 decisions are made by consensus; there is no formal system of voting. In the lead up to a G20 meeting, numerous issues are discussed beforehand by sherpas who “see how far you can go in the consensus machinery”108. Parties “anticipate what might come and test it”, with persuasion very much part of the process. There is much competition to get the consensus to accept an issue let alone accept a particular proposal, so parties choose carefully where they wish their political capital. In such an environment, there is a fine line between persuasion and problematization. An example of problematization occurred during the global financial crisis when G20 leaders declared the need to create a “global solution” to a global problem109, as became the catchphrase, particularly after the G20 Summit in London in April 2009. The G20 of course is hardly global; it is a limited multilateral forum of 20

 Simmons, op. cit.: 589–620.  Hulsse, Rainer. 2007. Creating Demand for Global Governance: The Making of a Global Money-laundering Problem, Global Society, 21, Issue 2. 108  Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 109  G20. 2009. “Declaration on Strengthening the Financial System (Annex to London Summit Communiqué)”, London, 2 April; US Treasury. 2009. “Prepared Statement by Treasury Secretary Tim Geithner at the G-20 Finance Ministers and Central Bank Governors Meeting”, Horsham, UK, 14 March. 106 107

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states rather than the world’s 195 countries110. Speaking in New York in November 2008, at the height of market turmoil, SEC Chairman Christopher Cox impressed the need for global cooperation, saying the most recent and visible proof of economic interdependence was the financial crisis that had swept the world’s economies. “What this means in practical terms,” he said, “is that markets in Bangkok are being affected by investment decisions made in Boise. Swings in the Dow may be related to trades originating in Dubai, or Dublin, or Dakar.”111 Such comments were designed to persuade other states to take part in new rulemaking efforts — albeit in what was a US and EU dominated process and US and EU dominated institutions.

 n Intensification of Cooperation During the Global A Financial Crisis The close US-EU cooperative relationship, their steerage of the solution to the crisis and the process of problematization was no more evident than during this period. As discussed in Chap. 4, the first G20 heads of state meeting in Washington in November 2008 sought to drive a wide range of regulatory reforms. The crisis provides a perfect example of the way in which the US and the EU and its key member states coordinated an initial response to a major problem that effectively set the reform agenda going forward. This period also highlights the degree to which cooperation intensified at a time that was seen as requiring significant financial reform. In doing so, the US and the EU created largely pre-determined outcomes for successive G20 summits and, by extension, the international financial governance framework. This in turn led to a reinforcement of a defacto US alliance in the area of international financial governance. There had been no shortage of enthusiasm for change. Regulators had cooperated on an agenda of regulatory reform for some years even though there had been delays on a range of issues, with some scholars describing cooperation in previous years as producing a “highly variable pattern of effectiveness in transgovernmental regulatory cooperation”112. There had been a period of inertia over the development and coordination of international financial standards relative to earlier periods. The regulatory environment in the US and the EU and in the international space was weak in a number of areas, from mortgage origination, derivatives regulation, credit ratings agencies and bank prudential standards among other areas. Throughout 2008, as the crisis picked up in severity, the political will for a range of regulatory reform on both sides of the Atlantic intensified. It was clear that banking prudential  There are 193 member states of the UN and the Holy See and the State of Palestine are observers.  Christopher Cox, SEC Chairman. 2008. “The Future of International Standards and Cooperation in Light of the Credit Crisis”, speech, FEI 2008 Current Financial Reporting Issues Conference, New York, 18 November 18. 112  Pollack, Mark A. 2005. “The New Transatlantic Agenda at Ten: Reflections on an Experiment in International Governance”, Journal of Common Market Studies, 43, Issue 5. 110 111

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standards had been inadequate, as had the adequacy of derivatives regulation, credit ratings agency regulation and a range of other financial areas. Much of the criticism was directed towards international standards. The European Commission heavily criticized the IOSCO code of conduct as failing to effectively regulate the conduct of credit ratings agencies prior to the financial crisis. After EU Internal Market and Services Commissioner Charlie McCreevy labelled IOSCO’s credit ratings agency code as “toothless”113 (see earlier chapter), the Commission announced plans for an aggressive overhaul of credit ratings agencies, derivatives regulation, hedge funds and banker remuneration among other areas. Congress had placed enormous pressure on US regulators to strengthen their regulatory rules in the US as well114. In a speech on financial regulation in September the-then presidential candidate Senator John McCain even said SEC Commissioner Christopher Cox should be fired115.

Early Coordination of US and EU Respective Agendas The trigger for a more closely coordinated US and European response was the collapse of US investment bank Lehman Brothers on 15 September. Congress prepared to develop an aggressive regulatory agenda and in Europe leading EU member states, notably France and Germany, led a loud call for tougher reform. French President Sarkozy called for a complete overhaul of the capitalist system while Germany’s Finance Minister Peter Steinbrück slammed what he said was the excesses of US-style “unbridled capitalism”116. US regulators  — notably the US Treasury and the SEC — intensified their efforts to coordinate their international regulatory agenda with their European partners, notably with the Commission117. The official goal of discussion was to set “a broad strategy for and coordinate approaches on financial market regulation” not just on a bilateral basis but also through international fora, including the G20, the then-FSF and also standards-­ setting bodies such as IOSCO, the BCBS, the IASB and other bodies118.   McCreevy, Charlie, European Commissioner for Internal Market and Services. 2008. “Regulating in a Global Market”, speech at Inaugural Global Financial Services Centre Conference, Dublin, 16 June. 114  Sirri, Erik R. 2009. “Regulatory Politics and Short Selling”, University of Pittsburgh Law Review, 71; Weitzman, Hal. 2009. “Financial Reform is Flawed, says CBOE chief”, Financial Times, 22 December; Lowenstein, Roger. 2008. “Long-Term Capital Management: It’s a ShortTerm Memory”, The New York Times, 7 September. 115  Sasseen, Jane. 2008. “McCain to Cox: You’re Fired!”, BusinessWeek, 17 September. 116  “Interview with German Finance Minister Steinbrück”, Der Spiegel, 29 September 2008. 117  Author interview with DG MARKT representative, European Commission, Brussels, 14 June 2014. 118  US Department of State, Bureau of European and Eurasian Affairs, “Transatlantic Economic Council: Annex 2 - Joint Report on US-EU Financial Markets Regulatory Dialogue for the TEC Meeting”, 27 October 2009. 113

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As discussed in Chap. 4, the US and the EU sought to agree on a number of broad policy approaches through the G7 and then the G20. The first was to coordinate their own domestic financial regulatory reforms including accounting standards, derivatives reform, credit ratings agencies, insurance, banking standards and other issues. The second was to agree on the further allocation of funds to the IMF, which would have a key role in responding to the financial crisis, an issue discussed in depth in the previous chapter. A third issue agreed upon was to promote the need to raise financial standards reforms internationally. The US was very much in favour of strengthening the then-FSF’s role. The President’s Working Group on Financial Markets, which was chaired by the US Treasury Secretary, wanted to work through the forum to implement any reforms119. It had worked closely with the G7 and the FSF throughout 2008 as the crisis intensified, notably with the FSF making a number of recommendations to deal with the escalating crisis earlier in the year120. These included stronger prudential oversight of capital, liquidity and risk management; enhancing transparency and valuation; changes in the role and uses of credit ratings; strengthening authorities’ responsiveness to risks; and arrangements for dealing with stress in the financial system121. Subsequently endorsed by the G7 in a conference call of G7/8 finance ministers and central bank governors on 22 September 2008122, the FSF was well positioned to play a central role.

The Trade-off Towards the end of 2008, the financial system losses were huge. There were estimates that losses on US-based mortgage-related and other credits alone would add up to $1.4 trillion, based on market prices in mid-September. Such losses made them the largest experienced in dollar terms of any post-war financial crisis123. The

 Paulson, Henry M. 2010. On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Hachette Book Group, New York; Paulson, Henry M. 2010. “How to Watch the Banks”, The New York Times, February 15; The Presidents Working Group on Financial Markets comprises of the US Treasury Secretary, the Chair of the Board of Governors of the Federal Reserve System, the Chair of the Securities and Exchange Commission, and the Chair of the Commodity Futures Trading Commission. 120  International Monetary Fund. 2008. “Statement by Secretary of the Treasury of the United States of America at the Seventeenth Meeting of the International Monetary and Financial Committee Meeting”, 12 April. 121  FSF “Report of the FSF on Enhancing Market and Institutional Resilience”, Basel, 7 April. 122  The G7 finance ministers and central bank governors agreed the FSF would “enhance the resilience of the global financial system for the longer term”  – see G7 Finance Ministers. 2008. “Statement by G7 Finance Ministers and Central Bank Governors on Global Financial Market Turmoil”, 22 September. 123  Global Financial Stability Report (2008) International Monetary Fund 119

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crisis had triggered a dramatic loss of confidence in the stability of the system and banks turned to hoarding of funding liquidity, which exacerbated the shortage of market liquidity in the US and European interbank money markets notably throughout 2008124. This prompted US and European leaders to act in concert to introduce economic stimulus measure to support market confidence. In late September and October, the US Federal Reserve, the European Central Bank, the Bank of England, Sweden’s Sveriges Riksbank and the Swiss National Bank carried out a coordinated interest rate cut125. The move was supported by the Bank of Canada and the Bank of Japan. This was followed by agreement by G7 finance ministers and central bank governors to stabilize our market126. These measures were not enough, with the US and European-led G7 leading moves for central banks to inject huge amounts of liquidity to stop money market interest rates from surging above targeted levels. However, while the problem started as a liquidity problem, it turned into major losses and bank capital writedowns. The prospect of the US and Europe injecting the sorts of capital in the global system needed to counter these effects was daunting. It was also clear that a number of EU member states would need assistance bailing out their troubled banks given their already high levels of sovereign debt. The negotiations over a role for the IMF in resolving the financial market problems at the time are discussed in the next chapter, however, the US and the EU, both in the G7 environment and in the G20 throughout late 2008, pushed for other major world economies to be involved in restoring financial stability and buoying financial markets through stimulus plans. Notably the BRICs countries (Brazil, Russia, China and India) were called upon to introduce stimulus plans. However, there was a trade-off. BRICs countries led calls for reforms to IFIs in return for assisting to resolve what was largely seen as a US and European problem. China and other developing countries were willing to contribute funds but were very much aware of US and European dominance of the fund and demanded further changes to the IMF’s governance127. Media reports also cited Chinese and Russian concerns about the dominance of the US dollar and the US itself in the global economy128.

 Keynote address by Mr. Már Gudmundsson, Deputy Head of the Monetary and Economic Department of the Bank for International Settlements, at the Financial Technology Congress 2008, Boston, 23 September 2008 125  “Monetary policy decisions”, European Central Bank, 8 October 2008 126  “G7 Finance Ministers and Central Bank Governors Plan of Action”, October 10, 2008, Washington DC. 127  Landler, Mark. 2009. “Rising Powers Challenge US on Role in IMF”, The New  York Times, 29 March. 128  Stewart, op. cit.; Landler, op. cit.; Choudhury, Uttara. 2008. “US Wants Help from the CashRich Economies”, DNAIndia, 23 November 2008. 124

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Broadening the International Governance Base By the time the November 2008 G-20 Summit in Washington took place, injecting funds into the world economy had become an acute priority. In return for promising to buoy the global financial system, the G-20 countries agreed to an overhaul of the voting and membership structures of major IFIs. They promised to “use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability”129. On November 10, 2008, the Chinese Government announced an Economic Stimulus Plan worth ¥4 trillion Chinese renminbi (about US$580 billion) involving spending over the subsequent two years on key industrial areas130. “With the deepening of the global financial crisis over the past two months, the government must take flexible and prudent macro-economic policies to deal with the complex and changing situation,” the Chinese government announced131. Four days later, the G-20 leaders’ summit from 14–15 November 2008 announced that the FSF should “expand urgently” to a broader membership of emerging economies, as should other major standard setting bodies. The IMF, in collaboration with the expanded FSF and other bodies, was tasked to work to “better identify vulnerabilities, anticipate potential stresses and act swiftly to play a key role in crisis response”132. In the months after the G-20 Summit, there were a number of important reforms. In January 2009, the IASB expanded its members from 14 to 16 and guaranteed geographical diversity on its Board for the first time: four members from Asia/Oceania, four from Europe, four from North America, one from Africa, one from South America, and two others. The next month, the key body reviewing and initiating regulatory initiatives within IOSCO — its Technical Committee — invited securities regulatory authorities from Brazil, India and China to join a body that previously included only G-7 countries, Australia, Hong Kong, Mexico, the Netherlands, Spain, and Switzerland. In March, it was the turn of the BCBS to expand its membership when it invited Australia, Brazil, China, India, Korea, Mexico, and Russia to join the existing members who had previously all been from developed countries (the G-7 plus Benelux, Spain, Sweden, and Switzerland)133.

 “G20 Leaders’ Declaration”, G20, Washington DC, 15 November 2008  “China Announces 4 trln Yuan Stimulus Plan”, Xinhua News Agency, November 10, 2008. 131  Ibid. 132  “G20 Leaders’ Declaration”, G20, Washington DC, 15 November 2008 133  “IOSCO Technical Committee invites Brazil, China and India to join its membership”, IOSCO, Madrid, 19 February 2009. 129 130

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US and EU Led Reforms The G20 Summit in Washington had reached agreement on a broad approach to responding to the global financial crisis, with coordinating economic stimulus programs to support liquidity and confidence in the financial system a priority at the acute stage of the crisis. However, agreement had not yet been reached on the proposed extensive program of financial regulatory reform for the global economy. It was after the G20 Summit in Washington that most of the reform negotiations took place. These resulted in a leading role for the US and leading European states in creating and shaping the reform agenda for the next several years. This was the result of extensive preparatory negotiations within the EU to form a consensus EU position and negotiations with US officials beforehand. In the EU, Germany hosted a “preparatory summit” in Berlin on 22 February 2009 in an effort to forge EU consensus prior to the later London summit in April. EU leaders identified hedge funds and other private pools of capital posing a systemic risk as problems to address as well as internal EU cooperation to prepare for financial system risks. The meeting was an unusual smaller grouping of EU states, comprising just the EU member states that are part of the G20 — the UK, Germany, France and Italy — as well as Spain and the Netherlands (which were invited as observers to the G20 summits) and the Czech Republic that held the EU presidency at the time. Also invited were the President of the European Commission and the President of the European Council, both of whom officially represented the EU. The preparatory summit discussed specific issues that the participants particularly felt should be reformed but also agreed on strengthening the roles of the IMF and the FSF134. These priorities were reaffirmed at a subsequent Franco-German council of ministers meeting on 12 March 2009135. These discussions set the scene and played a formative role in shaping the EU’s single position for the official EU summit the following month. A converged EU position gave it significant advantage going to the G20 summit. An additional advantage was that the UK, as host of the summit, was able to set the summit agenda. As is the usual practice at G20 summits, the host country places issues on the agenda for discussion. As Cobb, Roger an Elder describe, an agenda “serves to structure subsequent policy choices”136. Other countries can suggest other issues but all participating countries must agree for any issue to progress137. In the lead up to international summits, G20 leaders tend to negotiate a position beforehand around the draft agenda. Given the G20 decision-making is  “European Leaders Meet for Common Position on Crisis”, XinhuaNews, 22 February 2009.  “2008  G20 Washington Short-Term Compliance Report: Promoting Integrity in Financial Markets”, 14–15 November 2008 to 31 March 2009, G20 Research Group, University of Toronto 136  Cobb, Roger and Elder, Charles. 1983. Participation in American Politics: The Dynamics of Agenda-Building, The Johns Hopkins University Press, Baltimore: 171. 137  Ibid. 134

135

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made by consensus, it is more difficult for a single country to get an issue onto a draft agenda unless it has support from many other states138. As such, the host country has a distinct agenda-setting advantage. This is not to say there had been no disagreement. French President Nicolas Sarkozy continued to push hard for regulation of ratings agencies, arguing they had been totally unsupervised139. The UK, Germany and France had called for curbs on excessive bank bonuses and presented proposals to cap bank executive bonuses. However, the US pushed back against such ideas. Germany also pushed regulation of hedge funds and curbs to the trading of credit default swaps but this failed to gain UK or US support. Germany had also taken issue with US plans to include a “buy American” clause in its stimulus package. The Commission, which had revealed a draft regulation of credit ratings agencies, arguing that the existing international IOSCO code of conduct did not “offer an adequate, reliable solution”, was largely rebuffed by the US140. The US preference was to maintain the IOSCO code of practice in respect to credit ratings agencies and strengthen its role in coordinating full compliance between countries. There were also reports of a spat between the IMF and the FSF over what they envisioned their respective roles would be141. The day before the summit, the FSF’s Chair Mario Draghi and the IMF’s Managing Director Dominique Strauss Kahn jointly wrote to the G20 outlining how they saw the division of labor for reforming international financial standards. Pledging to “enhance our collaboration” they recommended that the then-FSF would “elaborate” on the various financial standards and coordinate activity among the standards-setting bodies (i.e. the IASB, IOSCO and BCBS) and that the IMF would monitor the global financial system142. The latter would assess the implementation of these standards by national authorities. The former would also assess macro-financial risks and vulnerabilities in the global economy and the latter would monitor the broader financial system risks and vulnerabilities and both bodies would cooperate in conducting “early warning exercises”.

 Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 139  Sarkozy, Nicolas, President of the French Republic. 2008. speech at the opening of the Sixteenth Ambassador’s Conference, 27 August. 140  European Commission. 2008. “Proposal for a Regulation of the European Parliament and of the Council on Credit Rating Agencies”, COM (2008) 704 final, Brussels, 12 November. 141  Engelen, Klaus. 2008. “Rift Barely Avoided: Letter from the G20 Summit”, The International Economy, Fall, 22, No. 4. 142  International Monetary Fund and the FSF. 2008. “Letter by Mario Draghi and Dominique Strauss Kahn to the G20”, 13 November, at https://www.imf.org/external/np/omd/2008/eng/ pdf/111308.pdf, viewed 4 July 2014. 138

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Largely Pre-determined Outcomes London G20 Summit Even so, as the EU had developed a converged position, and as the US and key EU states working with the European Commission and the IMF had discussed and formed a consensus beforehand, the G20 Summit in London in April took place with largely pre-determined outcomes. Following the summit, G20 leaders issued an eight-part declaration outlining a comprehensive plan for financial regulatory reform. Importantly the FSF was given a greater mandate to coordinate the implementation of a range of tightened regulatory standards with the various financial standards bodies and throughout the world. It would be upgraded to the FSB and gain a small secretariat in Basel, Switzerland, at the BIS. The new board was given a mandate for several specific tasks. These were to assess vulnerabilities affecting the global financial system; promote coordination and information exchange among country authorities responsible for financial stability; monitor markets and advise on the implications of market developments for regulatory policy; generate best practices by advising on and monitoring best practice in meeting regulatory standards; undertake joint strategic reviews of the policy development work of the international standard setting bodies; help to establish supervisory colleges; assist cross-border crisis management by supporting contingency planning particularly on systemically important firms; conduct early warning exercises in collaboration with the IMF; and enhance coherence among standard-setting bodies by helping to coordinate their activities143. In addition the new FSB was given powers to develop its own policies. These included policies on closing geographic regulatory gaps around money laundering, terrorist financing and better banking compensation practices. It would also have a role in developing standards for the regulation of derivatives, hedge funds and credit ratings agencies. One of its most important functions would be its monitoring and surveillance role — in a similar way that the IMF has a surveillance role over global economies. It would “address vulnerabilities” and monitor, advise and undertake joint reviews of member state country policies144. This effectively meant the FSB was able to check up on the world’s leading economies, allowing G20 to place diplomatic pressure on any country considered to be falling behind its implementation of any agreed global standards. The considerable boost to its mandate highlights the determination of the US and the EU to not only extend their own regulatory agenda to the world’s other developed economies but also to ensure that those measures would be transposed.  FSB, “FSB Charter”, at http://www.financialstabilityboard.org/wp-content/uploads/r_120809. pdf, viewed in 22 October 2014; G20. 2009. “Declaration on Strengthening the Financial System (Annex to London Summit Communiqué)”, London, 2 April, at http://www.treasury.gov/resourcecenter/international/g7-g20/Documents/London%20April%202009%20Fin_Deps_Fin_Reg_ Annex_020409_-_1615_final.pdf, viewed 16 July 2014; FSB, “FSB Mandate”, at http://www. financialstabilityboard.org/about/mandate/, viewed 12 November 2014. 144  FSB, “FSB Charter”, at http://www.financialstabilityboard.org/wp-content/uploads/r_120809. pdf, viewed in 22 October 2014. 143

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As part of negotiations with non-US and non-European countries, a number of significant changes were announced in respect to the voting and member bases of the key US and European-led IFIs. The FSF would be expanded to include all G20 countries (Spain and the European Commission were also included). Prior to this, the FSF’s country membership had been restricted to the membership of the G7 plus Australia, Hong Kong, Netherlands, Singapore and Switzerland (the body also includes international financial institutions, international regulatory and supervisory groupings, committees of central bank experts, and the European Central Bank). This reform was particularly important because the FSF had played the lead role in coordinating the international regulatory response to the crisis so far. The summit also announced that the FSF would be renamed to the Financial Stability Board (FSB), which would be led by a steering committee to guide the board’s work.

High Hopes but More of the Same Prior to the G20 Summit in Washington there had been hopes for a “new Bretton Woods”, a major change to the financial system, perhaps even new organizations. European Commission President José Manuel said the international financial system including “its basic principles and regulations and its institutions need reform. We need a new global financial order”145. This was not to be however, with the existing order and US and EU dominance very much maintained after the G20 summits. The new FSB, which remained dominated by the US and European nations, was also given a strengthened role. Prior to the London Summit of April 2009, the FSB included representatives of the authorities responsible for maintaining financial stability from the G7 countries, plus Australia, Singapore, the Netherlands and Hong Kong and Singapore. Several standards setting bodies and international organizations also had seats146. There are no hard and fast rules about the number of seats,  “Statement of the United States, France and the Presidency of the European Commission”, President Bush Meets with President Sarkozy of France and President Barroso of the European Commission, Camp David, US White House, October 18, 2008. 146  Prior to the London G20 Summit of April 2009 the then-FSF had 42 members, including (in addition to the Chairperson, who was appointed in a personal capacity) three representatives of each G7 member country (whether they were a finance minister, a representative of the central bank and a representative from the main supervisory authority), as well as a representative of the Reserve Bank of Australia and the central banks of the Netherlands, Hong Kong and Singapore. In addition the IMF had two representatives, the World Bank two, the OECD one, the BIS one and two representatives of each of the following institutions: the Basel Committee on Banking Supervision (BCBS), the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS). The International Accounting Standards Board (IASB) had one representative as did the two expert committees of the world’s central banks, namely the Committee on the Global Financial System and the Committee on Payment and Settlement Systems. Since the summit the organization has been comprised of the national authorities responsible for maintaining financial stability (finance ministers, central banks and/or market supervisory authorities) of the following countries: Argentina, Australia, Brazil, Canada, China, 145

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with the participating countries having between one and three representatives147. Those with three representatives tend to be those from G7 and BRIC countries and these countries also send a financial services regulator, usually covering the banking, insurance and securities. The FSB’s decision-making is also complex although major decisions are taken at a plenary meeting that operates on the basis of consensus. The requirement for consensus means that decisions can be reached only where consensus is reached148. Further the organization’s membership rules meant that those countries with the greatest combined political and economic weight dominated when it came omes to input149. This meant the US and European countries had greater input than countries with less economic clout in the world economy. After the summit the membership was widened to include the G20 countries but the organization’s membership remained US and European dominated. In fact, the London summit agreed that the FSB would report to both the IMF’s International Monetary and Financial Committee as well as the G20 on issues relating to “build up of macroeconomic and financial risks and actions needed to address them”. The IMF had also been given a significantly strengthened role, as discussed in the subsequent chapter.

The Maintenance of an Opt-Out At the same time, the non-binding nature of the existing standards bodies’ rules and the FSB guidelines effectively allowed the US and the EU to maintain an effective opt-out of regulatory standards. Most of the rules that form global financial governance are based on soft law instruments, including standards, framework agreements, model laws, memoranda of understanding, non-binding recommendations, opinions, action plans, best practice guidelines and principles. US regulators have reflected the overall US preference for voluntary standards, guidelines and codes instead of harder more compelling forms of governance such as treaties for example150. The EU has similarly been a promoter of soft law throughout the European France, Germany, Hong Kong, India, Indonesia, Japan, Korea, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Switzerland, Turkey, the UK, the US and the EU (where the later is represented by the European Central Bank and European Commission). In addition, various global standard-setting bodies had seats, namely the Basel Committee on Banking Supervision, the Committee on the Global Financial System (CGFS), the Committee on Payment and Settlement Systems (CPSS), the International Association of Insurance Supervisors (IAIS), the International Accounting Standards Board (IASB) and the International Organisation of Securities Commissions (IOSCO). Further, the international institutions, the Bank for International Settlements (BIS), the IMF, the World Bank and the OECD also had seats. 147  Donnelly, op. cit. 148  Ibid. 149  Ibid. 150  Chey, Hyoung-Kyu. 2007. “Do Markets Enhance Convergence on International Standards? The Case of Financial Regulation”, Regulation and Governance, 1: 295–311.

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integration process151. At the same time its prolific use of such instruments has helped diffuse soft law throughout global financial regulation152. Soft law can be described as “rules of conduct which in principle have no legally binding force but which nevertheless may have practical effects”153. Their attraction is that they are not legally binding on states or regulators, so do not require legislative ratification. They also provide flexibility in terms of implementation at domestic level. This has led to criticisms that such instruments represent a regulatory “second best” that lack the credible commitment needed in international co-­ operation and inevitably lead to regulation cherry-picking154. At the same time they have the effect of setting standards, consolidating norms and diffusing values that facilitate convergence of national laws. However, the US has been notable in its picking and choosing in respect to the adoption of international standards. Negotiations in 1992 over appropriate capital requirements for firms conducting securities businesses seemed to be going well, with IOSCO optimistic a final agreement could be reached at a forthcoming meeting. When it became apparent that agreement among IOSCO participating countries was feasible, the SEC surprised many involved in the negotiations by opposing the requirements saying the stand set was “dangerously low” and that IOSCO should be a “clearing house of ideas” and not a rule maker155. IOSCO subsequently abandoned the proposal. It has also been known for its frequent reluctance for its industry practices to be reviewed by external agencies156. For example the US refused to participate in the IMF and World Bank Financial Assessment Program when the Bush Administration was elected in 2000157. The US has kept its options open since, choosing sometimes to follow global rules and initiatives and sometimes not. The maintenance of a soft law environment where the rules are non-binding has allowed the most influential parties to the process such as the US and the EU to maintain an effective opt-out. The global financial governance regime remains based on non-binding rules that guide and facilitate private actor behaviour rather than compel it through harder legislative approaches. Indeed after the G20 summit in London the FSB decided to promote compliance not with detailed rules, but with a limited number of broad principles promoted by other bodies, such as the BCBS,

 Snyder, Francis. 1994. “Soft Law and Institutional Practice in the European Community”, in Martin, Stephen (ed.), The Construction of Europe, Kluwer Academic Publishers Dordrecht. 152  Newman, Abraham and Bach, David. 2014. “The European Union as Hardening Agent: Soft Law and the Diffusion of Global Financial Regulation”, Journal of European Public Policy, 21, No. 3: 430–452. 153  Snyder, op. cit. 154  Newman, Bach, op. cit.: 430–452. 155  Singer, David Andrew. 2004. Capital Rules: The Domestic Politics of International Regulatory Harmonization, International Organization, 58, No. 3: 531–565 156  Walter, Norbert. 2000. “The New Financial Architecture for the Global Economy”, in Kaiser, Karl; Kirton, John J.; Daniels, Joseph P. (eds), Shaping a New International Financial System, Ashgate, London; Financial Crisis Inquiry Commission, 2011, op. cit.: 423 157  Helleiner, Eric. 2010. op. cit. 151

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the IAIS and IOSCO. This “principles-based” approach to international coordination and harmonization gives participating states much greater policy breathing space158. It effectively allows the largest players, notably the US and the EU, to avoid the implementation of rules if suits them to do so. So while larger members like the US and the EU countries maintained an effective opt-out, other countries neverthless remained subject to FSB scrutiny and indirect influence through its peer review program. It is a system that inevitably favors the larger states, vis a vis the US and the EU.   The negotiations for the creation of a response to the global crisis was both initiated by and led by the US and European powers. While some states viewed the US and the EU as having formed a powerful alliance159, their historical dominance of the G20 and the key existing IFIs such as the IMF and the FSB, as well as possessing the benefit of setting the agenda for key G20 summits, allowed the US and the EU to largely pre-determine key decisive outcomes.

Conclusion Despite hopes for radical changes to the system of global financial governance, the G20 process consequently led to reinforcement of the existing order. Even the UK had proposed “a new Bretton Woods” before the G20 Summit in London to build “a new international financial architecture for the years ahead”160. There were changes to the international architecture, but they did not favor emerging economies. The new regulatory proposals and the system of enforcement merely reinforced US and EU hegemony in international financial governance. The G20 decision to give the FSB a strengthened role in international financial governance and affirm the mandate for the existing standards bodies reinforced the role of the US and the EU as the effective co-chairs of what was a defacto  global financial steering committee. It confirmed the power balance that existed between the developed economies (the “rule-makers”) and the middle or under-developed countries (the “rule-takers”)161. This outcome confirms criticisms that influences in the G20 are limited to the wealthier nations. Such reinforcement should not have been a surprise. There were calls for a “new financial architecture” in the wake of the Asian Financial Crisis in 1997–99 as well162. While that crisis did lead to the creation of the G20 and the formation of the FSF, the global financial governance architecture has remained largely intact ever

 Helleiner, 2010 op. cit.: 619–636.  “IMF Official: G20 Summit Unlikely to be Bretton Woods II”, Xinhua News, 14 November 2008. 160  Peacock, Mike and Ginsberg, Jodie. 2008. “Brown Calls for New ‘Bretton Woods’ Meeting”, Reuters, 13 October 2008. 161  Beeson, Bell, op. cit. 162  Beeson, Bell, op. cit.: 67–86. 158 159

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since. The outcome was a firm reinforcement of the existing institutional arrangements that have allowed the US and EU to enjoy a high degree of influence163. The maintenance of a status quo allowed both the US and the EU maintain the smaller “club-like” environment of financial standards-setting in the international arena — or what scholars have referred to as the “club governance”164.

 Helleiner, 2010, op. cit.: 619–636.  Tsingou, Eleni. 2014. “Club Governance and the Making of Global Financial Rules”, Review of International Political Economy, 19 March.

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The US and leading European nations have dominated the IMF ever since its inception. Despite its role having changed in recent decades, it remains an institution that reflects the interests of its major shareholders. Acting together, the US and European countries have exercised effective control over major decisions, including lending. This control has been well discussed and debated before. This chapter argues that during the global financial crisis, US and European interests in respect to global and European regional financial stability converged and were directed through the G7 and then the G20 process so as to transpose their domestic preferences in relation to the solution to the crisis. This included giving the IMF a central role in providing loans to EU member states in financial trouble and having large emerging BRICs and other emerging economies contribute to the funding pool. The outcome of this was that the IMF was given a substantial and reinvigorated lending and surveillance role in the global market and especially in the EU. As such, its role in the global financial crisis was a reflection of the US and EU state preferences as hegemonic actors in the institution. In this respect, this chapter also supports previously made assertions that IMF lending is heavily influenced by geopolitical factors,1 that the greater the political interest the US has in a country, the greater chance that country has of receiving a loan,2 and that the probability of a bailout increases as a creditor country’s economic or political exposure to a crisis

1  Copelovitch, Mark. 2010. The International Monetary Fund in the Global Economy: Banks, bonds, and bailouts Cambridge University Press, Cambridge.; Chauvin Depetris, Nicolas, and Art Kraay. 2007. “Who Gets Debt Relief?”, Journal of the European Economic Association 5: 333–42; Copelovitch, M. S. (2010). Master or servant? Common agency and the political economy of IMF lending. International Studies Quarterly, 54: 49–77; Dreher, A., Sturm, J.-E., & Vreeland, J. R. (2015). Politics and IMF conditionality. Journal of Conflict Resolution, 59(1): 120–148. 2  Thacker, Strom. 1999. “The High Politics of IMF Lending”, World Politics, 52.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_8

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country increases.3 All of these conditions were the case particularly in respect to lending by key EU member states as creditor states lending through the IMF to other EU states. After providing background to US-EU dominance in the IMF and a discussion of how the US and European countries maintain that lead, this chapter discusses how the IMF’s role in the global economy comes and goes in broad accordance with financial crises. It outlines how US and EU dominance in the IMF was manifested during the global financial crisis of 2008–09 and steered through the G20 process. With the IMF armed with further funding, EU member states were the biggest recipients of funding in the world during the period from 2008 to 2012. It shows how US interests in the IMF were both geopolitical and financial and benefitted the US economy and private interests. It finally discusses how the same applied in Europe. Lending outcomes aligned with the interests of the EU itself as well as key member states.

A History of US-EU Dominance The defacto US-European partnership in respect to international monetary control began with the creation of the International Monetary Fund (IMF) in the midst of WW2. Plans for the creation of the Bretton Woods institutions in 1944 involved representatives of 44 nations, including non-European and American, but in fact the institution firmly served US-European interests following the war. At its outset it was designed to promote international monetary cooperation and global economic stability, which necessarily involved a solution conceived and designed by Europeans and Americans. In the midst of WW2 the US and UK Treasuries negotiated the construction of what has been coined an effective financial “international constitution” to avoid the perceived interwar mistakes of wildly fluctuating exchange rates, the international transmission of deflation, currency devaluations and trade and exchange restrictions.4 A resulting draft document in 1943, based on a draft plan prepared by the UK and presented by its lead negotiator John Maynard Keynes and a US draft presented by its lead negotiator Harry Dexter White, formed the basis of the agreement at the Bretton Woods Conference in New Hampshire in 1944.5 As part of efforts to restore stability after the war and prevent a return to the currency devaluation and trade barriers seen in the Great Depression, the Bretton

3  Schneider, Christina J. and Tobin, Jennifer L. 2020. The Political Economy of Bilateral Bailouts, International Organization, 74, Issue 1, Winter 2020: 1–29. 4  Bordo, Michael D. and Eichengreen, Barry. 1993. “The Bretton Woods International Monetary System: A Historical Overview”, in Bordo, Michael D. and Eichengreen, Barry, A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, University of Chicago Press, Chicago. 5  Ibid.

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Woods Conference, officially named the United Nations Monetary and Financial Conference, led to the formation of the IMF and the International Bank for Reconstruction and Development (IBRD), the latter of which has since become part of the World Bank Group. The IMF was tasked to serve three key functions: to oversee the system of pegged exchange rates; provide temporary financial assistance to countries with balance of payments problems (conditional on their adjusting domestic policies appropriately); and work to eliminate restrictions on transactions in foreign exchange that could limit the growth of international trade.6 The IMF provided assistance to countries in the form of loans primarily to help members address shortterm balance of payments problems that put pressure on the members’ exchange rates.7 Even though the US and the UK were both instrumental in establishing the IMF, the US had a somewhat stronger position. The Bretton Woods meeting was both initiated and hosted by the US, which led to the drafting of the terms of the agreement. As the US had the dominant currency, shareholder subscriptions to the IMF were outlined in US dollars. Shareholders in the IMF were required to make payments to the US government in gold or the US dollar and fix their exchange rates to gold.8 As the US was the only country that pegged its currency to gold, and as the US held most of the world’s gold at the time, other countries effectively tied themselves to the US dollar. The Bretton Woods institutions were designed to establish the “economic foundations of peace on the bed rock of genuine international cooperation”9 but very much placed the US at the centre of this arrangement.

US-European Power Balance As with any parties to a relationship, power is not necessarily equally shared and this is the case with the US and Europe. In the postwar period, Europe remained somewhat more dependent on the US, politically, financially and economically. With Europe ravaged by war, European dependence on the US was distinctly consolidated after WW2. Firstly the war tipped the international financial order clearly in the US’ favor with the establishment of the Bretton Woods institutions, including the IMF, that placed the US at the centre of post-war international monetary and

6  United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire (1944), “Articles of Agreement of the International Monetary Fund”, statement, 22 July. 7  The World Bank in contrast was established at the International Bank for Reconstruction and Development (IBRD) to provide funding for the reconstruction of Europe. Its role has evolved gradually and its current mandate is to work with its affiliate, the International Development Association, and other members of the World Bank Group, to alleviate world poverty; Hagan, Sean, European Central Bank General Counsel and Director of the Legal Department. 2009. “10 Years of the Euro: A Perspective from the IMF”, speech delivered at the European Central Bank, Frankfurt, 29 January. 8  United Nations Monetary and Financial Conference, op. cit. 9  Vinson, Fred, US Treasury Secretary (1945), “Bretton Woods Monetary Conference”, Bretton Woods NH, 27 December, at World Bank Archives.

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financial policy-making. While London had been the financial capital prior to the war, the cost of fighting Germany saw it move from an economy in surplus to a net borrower. Further the enormous cost of reconstructing Europe meant Europe became highly dependent on US funding under the Marshall Plan, officially the European Recovery Plan, signed under President Harry Truman in 1948.  The price for US help with the war was US control over the outcomes. The 1970s began to tip the power balance in respect to international monetary issues. With European currencies pegged to the US dollar, the dilemma of linking long-term European stability to the short-term financial fortunes of one country — the US — was coined in the Triffin Paradox, after the Belgian economist Robert Triffin, a critic of the Bretton Woods system, a supporter of European integration and a proponent of the European monetary system. He in fact warned in the 1960s of the vulnerability of the transatlantic link and over-reliance on the US dollar.10 His warnings turned out to have significant merit, with instability and wild currency fluctuations in the EC prompting the Commission in 1968 to propose a review of the policy on economic and monetary coordination. The problems had undermined the EC’s common agricultural policy common price system.11 The consequent Barre Report in 1969 proposed greater economic coordination, with EC heads of government agreeing at the summit in The Hague in 1969 to a several stage approach to economic union “with a view to the creation of an economic and monetary union”.12 The result was the creation of a High-Level Group under the then Luxembourg Prime Minister Pierre Werner to report on how union could be achieved by 1980. The Werner Committee submitted a final report in October 1970, recommending a three-stage process over a ten-year period and although the report was shelved, there was a realisation among many policymakers and some intellectuals that monetary independence for Europe was both a priority and inevitable. There were calls for a European Reserve Fund to ward off future shocks and detach Europe from, as Dyson argues, the “cracks that were opened by a reluctant and retreating US hegemon”.13 With Europeans looking for solutions to the intensifying economic problems, an agreement was reached in April 1972 called the Basel Agreement that sought to stabilize exchange rate relations between currencies. Under the agreement the six EEC members agreed to peg their currencies to the US dollar, allowing a fluctuation of just 2.25%. However, what subsequently became known as the “Snake in the

 Triffin, Robert. 1960. Gold and the Dollar Crisis: The Future of Convertibility, Yale University Press, New Haven. 11  European Commission, “Phase 1: The Werner Report”. 12  Heads of State or Government of the Member States (1969), “Final communiqué of the Hague Summit”, 2 December. 13  Dyson, Kenneth. 2008. “50  Years of Economic and Monetary Union: A Hard and Thorny Journey”, in Phinnemore, David and Warleigh-Lack, A. (eds), Reflections on European Integration, Palgrave, London: 148. 10

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Tunnel” agreement14 barely functioned as further crisis triggered further efforts to seek an independent European solution. Again, the answer was seen as greater integration. The 1973 oil crisis, that started in October 1973 when the Organization of Arab Petroleum Exporting Countries announced an oil embargo in response to US support of Israel, and the later US-led stock market crash in 1973–74, contributed to aggravating inflationary pressures and balance of payments problems in Europe.15 After the US then floated its dollar in 1973 and countries in Europe started to leave the system — the Italian Lira in 1973, the French Franc in 1974 and, after re-­ integration in 1975, again in 1976, the Swedish Kronar in 1977 and the Norwegian Kroner in 1978 — there was a dawning that the peg system was not the long-term solution. After the collapse of the Bretton Woods system, particularly during 1973–76, European public finances and employment rates deteriorated, leading to a second attempt at economic and monetary integration in 1979 with a system that aimed to set up a zone of monetary stability. A new proposal for economic and monetary integration was put forward in 1977 by the then president of the European Commission, Roy Jenkins. This led to the European Monetary System in March 1979 that created the European Currency Unit, a currency unit based on a weighted average of EMS currencies  — which formed the basis of the monetary union today. European economic and financial outcomes have been both dependent on and to a large degree a product of US fortunes, with crisis binding them together. The result has been the creation of the euro, a significant challenge to the US as reserve currency.

“Some Minor Influence from Europe” The US dominance of the IMF from its inception, the central position of the US dollar internationally, the strength of US financial institutions and the role of large US market in the emerging global financial order reinforced US hegemony in the international financial system.16 This remained the case throughout 1950s and 1960s. Despite the rise of the euro currency, this balance — with the US at the lead and Europe in second place — has been maintained in IMF decision-making ever since its creation. A country’s voting power is based on its financial contributions, the major source of funding for the IMF. A country’s proportion of quota, or quota share, reflects its weight in the global economy, and these quotas dictate that country’s voting power at the IMF. The US has always maintained the largest voting  The “snake” referred to the European currencies and the tunnel referred to the narrow limits of the US dollar. 15  Papaspyrou, Theodoros. 2004. “EMU Strategies: Lessons from Greece in View of EU Enlargement”, paper presented at the Hellenic Observatory, The European Institute, London School of Economics, 20 January. 16  Eichengreen, Barry. 1987. “Hegemonic Stability Theories of the International Monetary System”, NBER Working Paper No. 2193, National Bureau of Economic Research Cambridge MA. 14

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Table 8.1  IMF Quota Formulas Quota formulas are complicated involving: a combination of GDP converted at market rates and PPP exchange rates averaged over a three-year period; the annual average of the sum of current payments and current receipts (goods, services, income, and transfers) for a five-year period; the variability of current receipts and net capital flows (measured as a standard deviation from the centered three-year trend over a 13-year period); the 12-month average over a year of official reserves (foreign exchange, SDR holdings, reserve position in the Fund, and monetary gold); a and a compression factor of 0.95. The compression factor is applied to the uncompressed calculated quota shares which are then rescaled to sum to 100. Source: International Monetary Fund (“IMF Quotas”, International Monetary Fund, March 25, 2020)

position. Some decisions at the IMF are taken with an 85% majority vote, other decisions with 70% majority and other decisions with a 50% vote. Decisions requiring an 85% majority include changes to the IMF’s Articles of Agreement, decisions about the number of executive directors, quota changes and withdrawal of member countries from the IMF among others (Table 8.1).17 A country’s quota more or less is reflected in the Executive Board, the fund’s peak decision-making, which is responsible for conducting day-to-day business. Currently comprised of 24 directors, several countries have their own permeant seat and other countries form groups, which have single representations. The largest shareholder is the US with 16.51% of the fund, with the next largest shareholder Japan its 6.15% and then China with 6.05% (Table 8.2). Taken as a whole, European countries represent the second largest majority. Germany has its own seat, as does France, the UK, Saudi Arabia and Russia (with Syria). Groups of countries comprise the rest of the seats. At the time of the G20 Summit in London, EU member states together held a 32.07% vote. As the US held a 17.69% voting share, this brought the combined US-EU voting position in the IMF to 49.76%. While this is just under the threshold for passage of IMF voting decisions that require a simple 50% vote, the US, Europe and Japan combined (the richest countries of the IMF) held 55.6% and, historically, Europe and Japan have rarely in the IMF’s existence voted against the US.18

 Bini Smaghi, Lorenzo. 2006. “Powerless Europe. Why is the Euro Area Still a Political Dwarf”, International Finance, 9, No. 2: 12. 18  Weisbrot, Mark; Cordero, Jose; Sandoval, Luis. 2009. “Empowering the IMF: Should Reform be a Requirement for Increasing the Fund’s Resources?”, Centre for Economic and Policy Research, April. 17

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Table 8.2  IMF Executive Board directors by Group IMF Members or Groupings US Japan China European countries (plus Israel) Germany Central America and Spain SE Asian countries and Nepal Southern European countries France UK Australia and Oceania Caribbean countries European countries (Scandinavian countries) Central European countries plus Turkey Other South Americas and Central American countries India, Bangladesh, Bhutan, Sri Lanka East and Southern African countries Switzerland, Poland, Serbia and Central Asian former Soviet Republics Russia (with Syria North Africa/Maghreb Middle East Saudi Arabia Sub-Saharan African Southern South America

Shareholding 16.51% 6.15% 6.05% 5.47% 5.32% 4.54% 4.34 4.13% 4.03% 4.03% 3.78% 3.38% 3.29% 3.22% 3.07% 3.05% 2.99% 2.88% 2.68% 2.54% 2.52% 2.01% 1.62% 1.59%

Source: International Monetary Fund (“IMF Executive Directors and Voting Power”, February 22, 2021, International Monetary Fund)

US Veto over Major Decisions The Executive Board can approve loans, policy decisions, and many other matters by a simple majority vote; however, a supermajority vote (which may require a 70% or 85% vote) is required to approve major IMF decisions. Importantly, the US is the only country with a veto over major decisions. This has attracted significant criticism over the years.19 The US veto effectively means every major IMF Executive

 Weiss, Martin A. 2011. “International Monetary Fund: Background and Issues for Congress”, Congressional Research Service, US Congress, Washington DC, 19 September; Wyeth, Earnest Natalie. 2014. “Myth vs. Fact: Why IMF Quota and Governance Reforms are Urgently Needed”, US Treasury, Washington DC, 14 March.

19

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Board decision is routinely run by (some scholars say “cleared by”20), the US Treasury. Decisions to activate New Arrangements to Borrow also require an 85% majority, meaning the US is highly influential over new lending arrangements under this particular mechanism (although decisions to actually disburse funds are made on the basis of a simple majority vote of the IMF Executive Board). The US position has naturally led to claims that the IMF is little more than a US pawn that reflects US security and economic priorities. The Washington think-tank Centre for Economic and Policy Research in fact argues that the IMF answers “mainly to the US Treasury with some minor influence from Europe”.21 The US Treasury Secretary serves as the US Governor to the IMF. The US has several times forced decisions on other states, such as in 2010 when it used a procedural manoeuvre to force economic reforms proposed by the IMF Executive Board, prompting Germany to propose that the US give up its veto and for the special voting majorities for the most important IMF decisions be lowered.22 Occasions where the US has placed political pressure on IMF lending decisions have been well discussed, including to Argentina in the 1980s and Mexico in the 1990s.23 The US notably has also used its influence in the IMF to pursue US financial and foreign policy objectives. Oatley and Yackee found for example that the IMF tends to offer larger loans to countries heavily indebted to US commercial banks than to other countries.24

Europe at the IMF European powers collectively have held the second largest voting bloc since the formation of the IMF although the EU has no official status. Even so, the European Commission has observer status in the International Monetary and Financial Committee (IMFC), but not in the IMF Executive Board, while the ECB has held observer status since the adoption of the euro in January 1999 due its exclusive legal competence under the EU treaties in respect to monetary affairs. The ECB also engages in other activities at the IMF including exchange rate surveillance, financial crisis resolution, anti-money laundering and monetary fraud prevention. Some scholars believe the EU is free to join the IMF at any time — should the member  Swedberg, R. 1986. “The Doctrine of Economic Neutrality of the IMF and the World Bank”, Journal of Peace Research, 23(4): 377–390. 21  Center for Economic and Policy Research. 2008. “CEPR Warns of Dangers of IMF Resurgence”, press release, 14 November. 22  Beattie, Alan. 2010. “Germany Asks US to Give up its IMF Veto”, Financial Times, September 14. 23  Oatley, Thomas and Yackee, Jason. 2014. American Interests and IMF Lending, International Politics, 2004, 41: 415–429. 24  Ibid 20

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states and IMF allow it. Article 138 TFEU states that “the Council, on a proposal from the Commission, may adopt appropriate measures to ensure unified representation within the international financial institutions and conferences”. Nevertheless, individual member states seem to have little appetite for a single EU representation at the IMF, despite a push by the European Commission for it. Instead, as a country-based organization, it is the individual EU member states that are members of the IMF. These states include both Eurozone and non-Eurozone member states. Under the IMF articles, all members are required to “collaborate with the fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates”.25 Yet there is a seeming contradiction for eurozone member states in their positions at the IMF, with eurozone members legally responsible for matters over which they have no direct control at home. The ECB’s absolute sole legal competence under the EU Treaties over monetary issues, meaning member states cannot legally create policy on the subject. Even so, member states are still able to negotiate independently on a range of issues at the IMF outside monetary policy. This includes on issues such as loan assistance to IMF members, structural adjustment programs that involve policy change conditions, funding issues and financial system and economic surveillance matters. In fact, some scholars suggest that eurozone member states do not actually qualify for IMF membership because they no longer possess the necessary responsibility of monetary sovereignty, nor can they fulfill their responsibilities under the IMF’s articles.26 Nevertheless there is a significant degree of EU member state coordination at the IMF. At the Vienna European Council of 1998, it was agreed that member states would be represented uniformly in international fora in respect to economic and monetary issues. The result is that there is an established mechanism for the EU to effectively present a common position in a range of issues. One of the working groups at the Economic and Financial Committee of the Commission is the SCIMF. Established in 2001, it consists of two finance ministry or central bank representatives of each member state as well as two representatives from the Commission (DG ECFIN) and two from the ECB. Once a position is developed, they are passed to an office at the IMF in Washington that represents the member states (the EURIMF). In practice, many other issues are dealt cooperatively with key EU institutions, the Commission and the ECB sitting down with IMF staff to work on specific issues, such as financial assistance for eurozone member states and joint assessment missions to European governments where needed.27 In this respect, the EU effectively represents the second largest block in the IMF.

 IMF Articles of Agreement, Article IV, Section 1  Smits, R. 1997. The European Central Bank: Institutional Aspects, Kluwer Law International, The Hague: 442. 27   Author interview with representative of the International Monetary Fund, Brussels, 14 February 2014. 25 26

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US and European Claims Over the Top Job In addition to their voting dominance, the US and Europe have always maintained an unofficial claim over the IMF’s top job of managing director. As part of an unwritten agreement between the US and Europe, a European has always headed the IMF and an American the World Bank. All IMF managing directors have also been from a EU member state, with two exceptions. Sweden’s Ivar Rooth was head from August 1951 to October 1956 and Sweden’s Per Jacobsson from November 1956 to May 1963. Sweden only joined the EU in 1995.28 Europe’s claim over the top position is not outlined in any of the IMF’s articles or bylaws but is instead a “gentlemen’s agreement” established when the institution was set up.29 At the time the IMF was established, US Treasury Secretary Frederick Vinson, with strong backing from Wall Street, was said to have argued that an American should run the World Bank and it was felt an American could not run both the World Bank and the IMF. So there was “little question that a non-American managing director meant a European one”.30 The effective reservation of the IMF top job to Europeans is part of what’s been called the “global spoils system” in which a series of informal understandings dictate which country gets leadership positions in hundreds of global international organizations from international financial institutions to regional development banks to UN agencies. It is a system that has had the effect of creating avenues for collective action and burden-sharing, but also acts as a force multiplier of US influence in the global community.31 The IMF’s governance has changed in recent decades, with efforts to broaden the IMF’s governance. After the Asian Financial Crisis of 1997–1999, there was considerable resistance to the IMF’s role in structural reform. Some scholars have cited a general perception that the fund’s governance structure was outdated “reflecting the receded realities of Atlantic-centered 1945 rather than of ascendant-Asia 21st century”.32 There have been several rounds of changes to the fund’s governance following concern and criticism over the years. One such reform took place in March 2008, when the Executive Board of the IMF endorsed a package of reforms adjusted quota shares to better reflect the relative weight of member countries in the world economy, particularly that of emerging economies.33 Further quota reforms took place in 2016 and further IMF resources and governance reforms in 2019.

 International Monetary Fund, “IMF Managing Directors”, 4 October 2014.  Keating, Joshua. 2011. “Why is the IMF Chief Always a European?”, Foreign Policy, 18 May. 30  Ibid. 31  Runde, Daniel F. 2020. “Defending the ‘Global Spoils System’ of Leadership Jobs in Multilaterals Is in the U.S. Interest”, CSIS Brief, Center for Strategic and International Studies, April. 32  Mattoo, Aaditya and Subramanian, Arvind. 2008. Multilateralism beyond Doha, The World Bank Development Research Group Trade Team, September 2008, Policy Research Working Paper 4735 33  “Reform of IMF Quotas and Voice: Responding to Changes in the Global Economy”, International Monetary Fund, April 2008 28 29

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The IMF’s Waning Role The IMF’s role has evolved considerably in previous decades. Of particular importance to the IMF is that the world fixed currency exchange rate system was abandoned in the 1970s. This meant the IMF became more focused on providing balance of payments relief for financially troubled countries instead of mediating the exchange rate system. Coinciding with the rise of emerging economies in the global economy, it has also meant a shift in emphasis on addressing more chronic state problems to under-developed nations through lending-related initiatives such as structural adjustment programs — longer-term programs that involve policy changes and come with greater loan conditionality. This shift has meant the IMF has effectively become more involved in shaping macroeconomic policy in a range of countries, driving regulatory reform in loan recipient countries and significantly shaping international financial markets governance generally. Another change was that the World Bank has to some degree overtaken the IMF’s role. The World Bank’s Structural Adjustment Loan program initiated in 1980 distinctly waded into waters that the IMF’s Extended Fund Facility established in 1974 occupied. This duplication led the World Bank and the IMF to form an agreement in 1989 under which the IMF would focus on macroeconomic and balance of payments issues and the World Bank on microeconomic and structural issues.34 The emergence and proliferation of other global development banks have also diminished the IMF’s role as a lender for economic structural reform. These include the European Investment Bank in 1958, the Inter-American Development Bank established in 1959, the African Development Bank Group in 1964, the Asian Development Bank in 1966 and the Islamic Development Bank founded in 1973. In addition, several international finance functions have been assumed by other organizations in the World Bank Group.35 Multilateral development banks have not been the only alternatives to IMF funding; the growth of private sector capital sources have also given industrialized countries alternatives to the IMF.36 Governments such as the US and the EU have also effectively played a role in structural economic adjustment through their own bilateral loans to poorer countries. The last IMF loans to major industrial countries in

 International Monetary Fund. 1989. “The IMF-World Bank Concordat” in “Selected Decisions and Selected Documents of the International Monetary Fund Thirty-Seventh Issue Washington, DC December 31, 2013”, Washington DC, 11 September 2014. 35  The World Bank Group (WBG) now encompasses five international lending-related organizations, namely the International Bank for Reconstruction and Development (IBRD) established in 1945, the International Finance Corporation (IFC) established in 1956, the International Development Association (IDA) established in 1960, the International Centre for Settlement of Investment Disputes (ICSID) established in 1965, and the Multilateral Investment Guarantee Agency (MIGA) established in 1988. 36  Federal Reserve Bank of St. Louis. 1993. “The Changing Role of the International Monetary Fund”, Economic Report of the President, St Louis, January: 308. 34

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support of adjustment programs were made to Italy and the UK in 1976.37 The IMF’s technical assistance role has also been challenged, notably by the growth of global technical and standards bodies that have gained new responsibilities in recent decades. There has also been growth in the number of think-tanks and private advisory and consulting firms assisting countries. At the time the global financial crisis accelerated in mid 2008, the IMF had only US$200 billion worth of loanable funds although could draw on additional resources through standing borrowing arrangements with groups of IMF member countries.38

The IMF’s Ebb and Flow The IMF’s role as an international financial lender has actually tended to ebb and flow along with global economic cycles. When economic times are good, its role tends to diminish, with fewer countries gaining loans. When financial crisis hits, the IMF is reinvigorated. Such reinvigoration is typically led by the US, which for example called on the world during the Asian Financial Crisis to channel loans to debtor countries through the IMF. The motivations for IMF reinvigoration and intervention tends to be commercial, especially when US and to a lesser degree European interests are at stake. One of the events to motivate the US during the Asian Financial Crisis was the near collapse of one of the US’ largest hedge funds, Long Term Capital Management. It started incurring losses as a result of the crisis in Asia in 1997 but as the crisis spread to Latin America and Russia it lost US$4.4 billion over five months from May to September 1998 due to excessive leveraging and risk taking.39 The Federal Reserve Bank of New York took the then unprecedented step of bailing out the fund amid fears that a forced liquidation would create even more havoc in the world financial markets. It is the rejuvenation of the IMF at times of crisis that has led to criticism that it is merely a “credit cartel” led by the world’s dominant economic powers.40 Such crises also tend to lead to a tighter control over surveillance. The IMF’s two semi-annual publications produced by the Fund, the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR), are the key instruments of the IMF’s multilateral surveillance. The former is focused on the world economy as a whole and the latter on the financial sector and capital markets. However, after the Asian Financial Crisis, the Financial Stability Forum (FSF)  — now the Financial Stability Board  Ibid.  “IMF Survey: IMF in Talks on Loans to Countries Hit by Financial Crisis”, IMF Survey online, International Monetary Fund, October 22, 2008 39  Donnelly, Shawn. 2012. “Institutional Change at the Top”, in Mayntz, Renate, Crisis and Control: Institutional Change in Financial Market Regulation, Max Planck Institute for the Study of Societies, July; Jorion, Philippe. 1991. “The Story of Long-Term Capital Management”, Canadian Investment Review, Winter 1999. 40  Weisbrot, Mark. 2007. “Wolfowitz and the Bank”, The Nation, 11 June 2007. 37 38

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(FSB) — was formed and assumed a monitoring, coordination and advisory role for the G20. The surveillance and assessment programs of such bodies, including the IMF, as discussed in the previous chapter, have the effect of creating powerful incentives for states to comply with standards created by such fora. Some scholars have argued that the IMF’s macroeconomic stability and structural adjustment programs reflect US determination to extend market-based economies to the developing world.41

A Manifestation of US-EU Dominance US and EU dominance in the IMF was manifested in an important way during the global financial crisis of 2008–09 — in respect to respective and convergent US and EU preferences in a reinvigorated role for the IMF during the crisis and an active role in Europe. This rejuvenation at the outset of the financial crisis is a prime example of the tendency to involve the IMF in times of crisis. In late 2008, when it became clear that some countries  — notably EU member states  — would need financial assistance, the US and key EU states agreed the IMF was appropriate to assist with financial stability and restructuring. In Europe, in the months before the G20 Leaders’ Summit in Washington in November 2008, it had become clear that not all EU member states would be in a position to bail out their banks. Several countries started to call on external help for their own sovereign debt obligations. While the crisis at this stage had been one affecting the banking system, the scale of the financial losses would soon take on another dimension. It was clear that a number of EU member states would need assistance paying their sovereign debt let alone bailing out their troubled banks. As of mid 2008 a total of 13 out of 17 Eurozone states had national debt-to-GDP limits that exceeded the limits considered acceptable under the Stability and Growth Pact that governs fiscal discipline in the EU. Introduced in 1998, the purpose of the agreement between the EU’s 28 member states is to ensure fiscal discipline in the EU by setting reference values for annual national budget deficits at 3% of GDP and public debt at 60% of GDP. Above 60% was considered “excessive” and yet current account deficits were particularly large in most countries.42 This reflected high levels of external sovereign borrowing in some countries, notably Greece, and high levels of borrowing by private sector banks, notably in Spain, Portugal and Ireland.43

 Oatley, Thomas and Yackee, Jason. 2014. American Interests and IMF Lending, International Politics, 2004, 41: 415–429 42  “Stability and Growth Pact”, DG ECOFIN, European Commission. 43  Barkbu, Bergljot; Eichengreen, Barry; and Mody, Ashoka. 2012. “Financial Crises and the Multilateral Response: What the Historical Record Shows”, Journal of International Economics, 88: 425. 41

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The Solution: A US Led Decision The decision to make the IMF instrumental in steering financial stability and then managing structural reform through its economic restructuring and surveillance programs was a US decision and was directed first through the G7/G8 to gain European support and then the G20 to gain wider support. After the collapse of Lehman Brothers in September 2008, in addition to the desire to further boost market liquidity with another round of economic stimulus measures and provide deposit guarantees to banks around the world, one of the objectives was to deepen the pool of funding contributors to the IMF. The US and the UK particularly saw the fast-­ developing BRICS countries (Brazil, Russia, India, China and South Africa) as potential contributors. The first public support for an increased IMF role was in October, with a G7 statement on October 10 and a G8 statement on October 15, both which noted leaders’ “strongly support the IMF’s critical role in assisting affected countries”.44 Later in October 2008, European leaders met with US President George Bush at Camp David, at which Bush “insisted” on a G20 that included China and India.45 At the summit itself, the US had placed on the agenda plans for a round of fiscal stimulus to stimulate the market, a proposal that efforts would be coordinated through existing international financial institutions (the IMF, the World Bank, the regional development banks), coordinated monetary policy actions in G20 economies and an expanded role of the Financial Stability Forum (see chap. 4 for a further in-depth discussion). Elsewhere in the EU, German Chancellor Angela Merkel was in favour of the IMF role as early as October46 although her Finance Minister Wolfgang Schäuble was opposed to it. Despite efforts to persuade non-US and non-European countries to contribute to the IMF, only Japan had contributed by the time of the G20 Washington summit, contributing US$100 million in the form of loans of US Treasury notes, a commitment it had announced as early as September.47 This was followed by the EU, Norway, Canada, the US and others. China, Russia, India nor the Gulf States were willing at this point, with all either cautious about the US role in managing the process and/or wanting reform of the governance base of international financial

 “G7 Finance Ministers and Central Bank Governors Plan of Action”, October 10, 2008, Washington DC; “G8 Leaders Statement on the Global Economy” October 15, 2008 Grand Rapids, Michigan. 45  Paulson, op. cit.: 375. 46  Matthias Sobolewski, Paul Carrel, “Germany adopts 500 billion euro bank rescue package”, Reuters, October 13, 2008 47  Holroyd, Carin and Momani, Bessma. 2012. Japan’s Rescue of the IMF, Social Science Japan Journal, 15, No. 2: 201–218 44

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institutions such as the IMF first.48 China and other developing countries expressly pushed for changes to the IMF’s governance.49

Efforts to Broaden the Funding Base: Drumming up Support Following the Washington summit, British PM Gordon Brown, whose country would host the subsequent G20 Summit in London in April, championed the IMF in Europe. At host country, the UK had the opportunity to establish the summit agenda and, in addition to pushing for reform of the international financial system, explicitly impressed a role for the IMF. Talking up the need for all members to contribute funds,50 Brown had notable support from Australia’s Prime Minister Kevin Rudd who had also been drumming up support for further allocations of IMF Special Drawing Rights (SDRs) in Asia.51 Prior to the G20 Leaders’ Summit in London in April 2009, Brown went on a road trip to Brazil to buffet support for the UK’s vision, with one media report citing his spokesperson as saying he had been “working the phones very hard” to obtain a consensus view prior to the summit.52 At one point there was the suggestion that the IMF would supervise and finance a network of bad banks that would take on the worst of the financial system’s toxic assets. The idea was to effectively create an international bailout fund that would be run by the IMF. The UK also argued the IMF should have even greater powers of market and economic surveillance and the ability to provide an early warning system about potential vulnerabilities. Germany organized a mini-summit for mid-February among the EU member states that were in the G20 in an effort to coordinate the EU position ahead of the broader EU Heads of Government Summit the following month and ahead of the G20 Leaders’ Summit in London in April. The EU’s G20 countries, Germany, France, the UK and Italy, plus the two largest European non-G20 members, Spain and the Netherlands, attended the meeting in Berlin on 22 February. The elite group agreed to give the IMF a role in responding to the crisis and placed priority on a number of other important measures, including hedge fund reform, accounting rules

 Choudhury, Uttara. 2008. “US Wants Help from the Cash-Rich Economies”, DNAIndia, 23 November 2008; Taylor, Paul. 2008. “New Economies Want Power Before Paying”, Reuters, November 19. 49  Landler, Mark. 2009. “Rising Powers Challenge US on Role in IMF”, The New  York Times, 29 March. 50  Peacock, Mike and Ginsberg, Jodie. 2008. “Brown Calls for New ‘Bretton Woods’ Meeting”, Reuters, 13 October 2008; “Gordon Brown’s Call for a New Bretton Woods Gains Traction”, The Telegraph, 15 October 2008. 51  Wintour, Patrick. 2008. “Gordon Brown Plans Financial Crisis Talks with George Bush”, The Guardian, 26 September. 52  “France Threatens Walkout Before G20 Summit”, Agence France Presse, 31 March 2009. 48

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reform and financial markets supervisory reform, but rejected the UK and US push for further stimulus measures.53 The consensus agreement at the mini summit made it a virtual certainty that a follow-up broader EU Heads of Government Summit in March in Brussels would back their position. Holding a meeting of a smaller group of heads of government first meant that any dissenters at the second would be outvoted by the already established consensus position. Accordingly EU leaders at the Brussels meeting agreed to “very substantially increase IMF resources” so it could help its members swiftly and flexibly in the event of balance of payments difficulties.54 The official EU Summit in Brussels also endorsed a greater role for the IMF and rejected US pressure to provide a further round of stimulus measures as the US had done.55 They further supported the efforts to cast the net for IMF funding more widely, to China and Saudi Arabia among others. As such, at this point a centre place for the IMF in responding to the financial crisis looked certain. The plan to boost the IMF’s resources had the backing of the US and the EU.  The UK, Germany, France, and the rest of the EU Heads of Government had agreed to support its key role, as did the Commission.56 The US and the EU agreed in discussions before the G20 Leaders’ Summit in London took place that the IMF should play a central role in the response to the crisis.57 The agreement between the US and the EU  — that together have dominated G20 decision-­making from the outset — meant the IMF’s place in the post-crisis order was secure.58 On the priorities for financial reform, however, the US and various EU member states were divided. As the London G20 Summit approached, two camps started to form around a range of issues. On one hand was an Anglo-American alliance and the other a Franco-German camp. The US and the UK were in favour of a second round of fiscal stimulus measures, a lighter approach to regulation and the use of

 Sarkozy, Nicolas and Merkel, Angela. 2009. “Preparation for the G20 Summit”, letter sent jointly by Nicolas Sarkozy, President of the Republic and Angela Merkel, Chancellor of Germany, to Mirek Topolanek, Prime Minister of the Czech Republic and José Manuel Barroso President of the European Commission, 16 March; Dougherty, Carter. 2009. “EU Leaders Turn to IMF amid Financial Crisis”, The New York Times, 22 February. 54  Council of the European Union. 2009. “Presidency Conclusions 19–20 March 2009”, 29 April. 55  Lopatka, Jan and Prenesto, Frank. 2009. “EU Backs Stronger IMF, Eastern Aid Lifeline”, Reuters, 20 March. 56  The EU is a member of the G20 and is represented at the G20 summits by the European Commission President and the European Council President. 57  Author interview with representative of the G20 Sherpa Office, European Commission, Brussels, 25 July 2012. 58  The President of the European Commission and the President of the European Council represent the EU at the G20 at leaders’ level. In addition several EU member states are represented at the G20: the UK, France, Germany, Italy and the UK. Spain is also a permanent invitee of the G20. In addition, the G20 presidency host country invites about six guest countries to attend and the Netherlands attended the first four G20 Leaders Summits. See European Commission, “Facts and figures about the European Union and the G20”. 53

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existing fora like the IMF and the Financial Stability Forum to strengthen regulatory co-operation and develop crisis early-warning systems.59 On the opposing side was the France-Germany alliance. Sarkozy and Merkel presented a united front and days before the G20 Summit in London they issued a joint declaration noting “a totally identical position” on the need for further financial regulation in response to the crisis.60 They wanted more stringent crackdown on tax havens, hedge funds, banking transparency and bankers’ bonuses than the UK had proposed and opposed further fiscal stimulus measures.61 While there were notable differences in position on a number of financial reform matters, the US and the EU held a clear common position favouring a clear role for the IMF in the post-crisis order.

G20 Agrees on a New Lease of Life for the IMF At the G20 Summit in London itself, the efforts to boost the IMF’s role and Gordon Brown’s efforts to convince developing economies to provide more of the funding paid off. G20 leaders pledged to treble the IMF lending capacity to US$750 billion, plus create an extra Special Drawing Rights allocation of US$250 billion and a further US$250 billion in trade finance that the IMF could lend.62 They pledged a further US$100 billion for the multinational development banks to lend. The funding pledges totalled an extra US$1 trillion for the IMF. The pledges gave the IMF a new lease on life. In just the four years to 2008, the IMF’s total loan portfolio shrunk from US$105 billion to less than US$10 billion, with more than half of its loan portfolio consisting of loans to Turkey and Pakistan. The IMF even went through its own cost cutting and staff reductions.63 This meant that in the years leading up to the acute phase of the financial crisis in 2008, when the IMF was called into Iceland, Latvia, Hungary and the Ukraine, the IMF’s place in the global financial governance had not only been undermined by the changing nature of international funding but also diminished. At the time of the summit in London the IMF’s lending capacity was US$250 billion. But the new funding pledges gave it a substantial boost. As a compromise with BRICs and other countries, the G20 agreed to broadening the IMF’s quota system. (As it turned out, pledges were one thing and binding lending agreements were another. In fact the pledges at the summit in London were just that — pledges not commitments. Not all of the funding pledges were honoured and, as of August  Parker, George. 2009. “PM Enlists Old Friends to Spur G20 prospects”, FT.com, 5 March.  Vucheva, Elitsa. 2009. “France and Germany Unite Positions Ahead of Summit”, EU Observer, 13 March. 61  Landler, op. cit.; Chapman, James and Lea, Michael. 2009. “Love and Hate: Brown and Obama Enjoy a Very Special Relationship but Man Dies as Violence Explodes on the Streets”, The Telegraph, 2 April. 62  International Monetary Fund, “Bolstering the IMF’s Lending Capacity”, 5 August 2013. 63  Weisbrot, Mark. 2008. “The IMF’s Dwindling Fortunes”, Los Angeles Times, 27 April. 59 60

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2013, the IMF had signed lending agreements with various countries worth just over US$500 billion64 — not the US$1 trillion promised.)

US Interests in the IMF, Geopolitical and Financial The IMF was back in business. But why did the US and EU positions converge and why did they both throw their support behind the IMF? Taking the US first, there were several key US interests behind its support for the IMF in Europe. Firstly, IMF lending decisions have been found to be broadly aligned with the geopolitical priorities of major shareholders, notably the US.65 In late 2008, when the US and EU were discussing a response to the fast-evolving financial crisis on a bilateral basis and in the G7, as discussed in earlier chapters, US financial and economic interests in Europe were significantly threatened by the financial losses in the European financial system and the EU member states facing balance of payment problems. The EU was overwhelmingly the US’ most important trade partner. US-EU trade generated US$3.75 trillion in total commercial sales a year and in respect to the US and EU financial services industries specifically, in 2008 the two markets together comprised nearly US$4.1 trillion (€2.8 trillion) in direct investment and had stock and bond flows worth more than US$51.3 trillion (€35 trillion) a year.66 US foreign affiliate income earned in Europe in the first half of 2008 was worth US$47 billion and in total Europe accounted for roughly 55% of the US$1 trillion in global aggregate output of US affiliates in 2006. Europe’s interest in the US was reciprocally also significant. In the US, fears of a “reverse contagion” were particularly acute.67 There was a great deal of concern that any credit crunch or default in Eastern Europe would have

 As of 5 August 2013 the following countries had committed funds to boost the IMF lending capacity: Japan $100 billion, European Union $178 billion, Norway $4.5 billion, Canada $10 billion, Switzerland $10 billion, United States $100 billion, South Korea $10 billion, Australia $5.7 billion, up to Russia $10 billion, China up to $50 billion, Brazil up to $10 billion, India up to $10 billion, Singapore $1.5 billion and Chile $1.6 billion. From International Monetary Fund, “Bolstering the IMF’s Lending Capacity”, 5 August 2013. 65  Copelovitch, Mark. 2010. The International Monetary Fund in the Global Economy: Banks, bonds, and bailouts, Cambridge University Press, Cambridge; Chauvin Depetris, Nicolas, and Art Kraay. 2007. “Who Gets Debt Relief?”, Journal of the European Economic Association 5: 333–42; Copelovitch, M. S. (2010). Master or servant? Common agency and the political economy of IMF lending. International Studies Quarterly, 54: 49–77; Dreher, A., Sturm, J.-E., & Vreeland, J. R. (2015). Politics and IMF conditionality. Journal of Conflict Resolution, 59(1): 120–148. 66  EU-US Coalition on Financial Regulation. 2008. “Mutual Recognition, Exemptive Relief and “Targeted” Rules’ Standardisation: The Basis for Regulatory Modernisation”, Securities Industry and Financial Markets Association, March 2008. 67  Dougherty, Carter, Schwartz, Nelson and Norris, Floyd. 2008. Financial Crises Spread in Europe, New York Times, October 5. 64

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a domino effect to other markets.68 At the time, the Institute of International Finance, a global association that represents a wide range of global financial institutions, including banks, insurers, hedge funds, central banks, and development banks, forecast that net private capital flows to emerging Europe were projected to fall from an estimated US$254 billion in 2008 to US$30 billion in 2009. An IMF forecast in April warned that the situation in Eastern Europe would get much worse and said the financial crisis was putting severe strains on the vulnerabilities of emerging European economies and that credit losses at foreign subsidiaries of western European banks were threatening to start a downward “vicious cycle”.69 Even though many of the financial system losses originated in the US they risked flowing back to the US dramatically because financial support available to Eastern European countries was limited. Not only were many member states unable to provide financial help to their banks and the EU itself unable to do so, but the banking market was so illiquid and paralyzed with fears about their exposure to the so-called toxic bank assets at the time, that the market had deserted Eastern Europe. The IMF estimated the “financing gap” in some countries — the money that could be found in the market — was particularly large: Romania US$34 billion, Turkey US$40 billion and Poland US$59 billion.70 Indeed the US Treasury later argued that IMF lending programs in Europe had helped “mitigate the spillover effects of the European crisis on our shores”.71 The US was also concerned that deteriorating conditions in Europe might prompt a political response in Europe that would make matters even worse. The levels of US foreign direct investment in Europe at the time were significant and what the US could not afford was another shift to “fortress Europe” and closed or protectionist tendencies that the US feared during the Reagan Administration. US-EU trade levels were particularly high and the risk of protectionist measures would have potentially severe effects on the US. US concerns continued to be omnipresent two and three years later as the financial crisis continued and evolved into as a sovereign crisis in the Eurozone. Writing an opinion piece in the Financial Times, US President Obama said Europe needed to create a “credible firewall” to bring its debt crisis under control. The US Treasury’s Under Secretary for International Affairs told a Congressional hearing that further deterioration in Europe could have a material adverse impact on the US financial system. “The globally connected nature of financial markets means that stress in European financial markets will be felt in the United States,” he said.72 The  Schwartz, Nelson D. 2009. “As it Falters, Eastern Europe Raises Risks”, The New York Times, 23 February. 69  International Monetary Fund. 2009. “Responding to the Financial Crisis and Measuring Systemic Risk”, Global Financial Stability Report, Washington DC, April. 70  Wagstyl, Stefan. 2009. “IMF Warns of Strains Exerted on East Europe”, FT.com, 5 April. 71  Wyeth, op. cit. 72  “Statement of Lael Brainard, Under Secretary for International Affairs, Department of the Treasury”, US Senate Hearing Before the Committee on Banking, Housing and Urban Affairs, Second Session on Examining the European Debt Crisis and its Implications, February 16, 2012. 68

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importance the US placed on the deteriorating situation in Europe is highlighted by an analysis of US Treasury Secretary’s phone calls in a later period. The Brussels-­ based economic think tank Bruegel examined a record of the phone calls and meetings of US Treasury Secretary Timothy Geithner between January 2010 and June 2012 when the bailouts of Eurozone members Greece, Ireland and Portugal took place and found that most phone calls were made to the IMF.73 In summary, domestic interests in the US were severely threatened in a highly interdependent environment that created a compelling argument for financial help in Europe.

Securing US Private Interests Secondly, an increase in US contribution to the IMF for international lending would invariably protect and assist the interests of US stakeholders with huge interests in the IMF’s lending priorities. The argument is that large financial firms and policymakers have considerable incentive in liberalized markets to exploit commercial opportunities. The IMF programs themselves were designed by what Bhagwati refers to as a powerful network of “like-minded people” involving the most powerful institutions in America: Wall Street, the US Treasury, the State Department, the World Bank and also the IMF.74 Coined the Wall Street–Treasury complex, such actors tend to hold and share similar values and preferences, with one of the notable characteristics the degree to which key people move from one institution to the other. For example, former Goldman Sachs co-chairman Robert Rubin became the Treasury Secretary under Clinton, former Goldman Sachs CEO Henry Paulson became the Treasury Secretary under George W. Bush, and Paulson’s predecessor Treasury Secretary John Snow later became the chairman of private-equity firm Cerberus Capital Management.75 These values and preferences include the opening of new markets, deregulation, the opening and expansion of capital markets and the liberalisation of cross-border capital flows. The argument that these institutions promote such goals in Washington is not new.76 It has also been well discussed that such measures form part of the standard IMF prescription for lending through its conditional programs. Following the economic restructuring programs that emerged during the Reagan Administration in the 1980s, US economist John Williamson coined these as part of the now

 Pisani-Ferry, Jean. 2012. “Tim Geithner and Europe’s Phone Number”, Bruegel, Brussels, 4 November. 74  Bhagwati, Jagdish. 1988. “The Capital Myth: The Difference between Trade in Widgets and Dollars”, Foreign Affairs, Council on Foreign Relations, May/June: 7–12. 75  Johnson, Simon. 2009. “The Quiet Coup”, The Atlantic, May. 76  Bhagwati, op. cit.: 7–12; Gould, Erica R. 2003. Money Talks: Supplementary Financiers and International Monetary Fund Conditionality, International Organization, 57, Issue 3, Summer 2003: 551–586. 73

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infamous Washington Consensus.77 The “Washington” component comprises the top decision-makers at the IMF, the World Bank, the Inter-American Development Bank and the US Executive, and members of Congress who take an interest in Latin America, and the think-tanks concerned with economic policy. Williamson identified ten typical policy instruments (as opposed to objectives or outcomes) and “orthodox views” about economic management that he perceived “Washington” thought was important.78 These were namely: a strong belief in fiscal discipline and particularly against large and sustained fiscal deficits; a preference for reducing public expenditure rather than increasing tax revenues to tackle deficits; a general aversion against tax increases (with broad based taxes preferred); a belief in market-determined interest rates; market-determined exchange rates; trade liberalization and an aversion to protectionism, particularly import licensing; an aversion to restrictive attitudes towards limiting the entry of foreign direct investment (although liberalisation of foreign financial flows is not regarded as a high priority per se); a strong belief in privatization; a belief in market deregulation (barriers to entry and exit); and strong enforcement of property rights.79 Numerous countries have carried out such policies as part of their transformation to more market-­orientated economies, some of them following the prescription closely and quite successfully, with Chile and Brazil notable examples.80 Accordingly, market-orientated policies, designed mostly in the UK and like-­ minded countries, end up being promoted in Washington and manifest as policy at the IMF. At the same time, although IMF loans are typically accompanied by conditionality, which include a range of measures such as market liberalization, the sale of state assets, private international lending, and market deregulation among others, they are not necessarily applied equally to all loan recipients. The IMF has been known to make different decisions on a case-by-case basis, with the result that there is frequently significant variation in IMF program size and conditionality across both time and space.81 Copelovitch argues that when leading states’ commercial banks are exposed in crisis countries, executive board members can intervene to protect their constituents’ interests by promoting larger bailouts with fewer conditions. Given this, an increase in IMF lending in the world economy allowed the largest institutions in the so-called Wall Street–Treasury complex to extend their influence in the international economy when the US needed it most.

 Williamson, John. 1990. “What Washington Means by Policy Reform”, in Williamson, John (ed.): Latin American Readjustment: How Much has Happened, Washington, Peterson Institute for International Economics. 78  Ibid. 79  Ibid. 80  “A Conversation with John Williamson”, Washington Post, 12 April 2009. 81  Copelovitch, Mark. 2010. The International Monetary Fund in the Global Economy: Banks, Bonds and Bailouts, Cambridge University Press, Cambridge. 77

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US International Lending Benefits Thirdly, the IMF’s role would also have the effect of consolidating US political influence over massive amounts of international lending for broader national economic goals. The US has historically held a net financial position due to higher returns on its external assets than on its external liabilities. It has contributed to the US running larger trade and current account deficits without worsening its external position. It is a condition that Gourinchas, Rey & Govillot characterize as a situation in which the US effectively provides insurance to the rest of the world during crisis periods.82 For example, during the 2007–2009 global financial crisis, payments from the US to the rest of the world amounted to 19% of US GDP. Gourinchas, Rey & Govillot characterize this as the “exorbitant duty” of the US in that in times of global stress, the US effectively provides insurance to the rest of the world. One of the ways it does this is through the IMF. However, this situation actually reversed at the outset of the financial crisis, with its net foreign asset position deteriorating between the third quarter of 2007 and the first quarter of 2009, largely as a result of massive losses on its assets abroad. This meant the US was keen to turn around the flow of wealth back to the US. One way to do this would be to boost US lending through the IMF significantly.83 Indeed the financial crisis came at a time a growing power shifts in international lending. Prior to the London G20 Summit China had extended multi-billion-dollar currency swaps to South Korea, Hong Kong, Indonesia, Malaysia and Belarus, while the Association of Southeast Asian Nations (ASEAN) plus three countries moved forward with plans to establish a rival Asian Monetary Fund.84 As such, a greater role for the IMF helped the US maintain its place in the field of international lending. As the US Treasury has said in defending its support for the IMF to Americans, its IMF involvement helps “shelter the US economy from financial turbulence abroad… the IMF helps us protect American jobs”.85 Finally, in working through the IMF, the US (and European countries which also substantially increased contribution) avoided political backlash domestically. International organizations such as the IMF can be considered as effective agents of states in a principal-agent relationship.86 They tend to suffer from principal-agent problems more so than other public or private organizations as the links to their

 Gourinchas, Pierre-Olivier; Rey, Hélène; Govillot, Nicolas. 2010. “Exorbitant Privilege and Exorbitant Duty”, Bank of Japan, Institute for Monetary and Economic Studies, Tokyo. 83  Ibid 84  Weisbrot, Mark. 2007. “Wolfowitz and the Bank”, The Nation, 11 June 2007. 85  Natalie Wyeth Earnest. 2014. Myth vs. Fact: Why IMF Quota and Governance Reforms are Urgently Needed, Treasury Notes, US Treasury. 86  Nielson, Daniel L. and Tierney, Michael J. 2003. Delegation to International Organizations: Agency Theory and World Bank Environmental Reform, International Organization, 57, No. 2: 241–276. 82

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principal bases, such as a country’s voters, is more remote.87 Indeed, in late 2008 the US was struggling to pass its own financial assistance package through Congress to support the US financial system, let alone offer bilateral assistance to Europe. Even in 2009, the US was struggling to stabilize its financial markets and return the economy to growth. This argument supports the proposition  that states like the US exert influence directly with a country when that country is viewed favourable domestically, but when they are not, intervention is often made via international organizations. For example, Dreher, Lang, Rosendorff and Vreeland found that amid US domestic concerns about the US budget deficit, US aid to Russia was cut, but conversely the IMF became heavily involved in Russia, approving a $US6 billion loan program in 1995, increasing it to more than $US10 billion the next year and $US18 billion in 1998 — a move the US supported.88

European Interests The IMF’s rejuvenation aligned not only to US financial interests but the EU’s as well. There were several factors involved in the EU’s decision to agree to IMF involvement in the response to the financial crisis. While the US’ interests were to maintain its influence over IMF lending, maintain and even extend its influence in Europe and reinforce the interests of the US economy and its financial institutions, the EU’s support for the IMF was initially more divided and more complex. Nevertheless its interests were both financial and political in nature. Firstly, in mid to late 2008 during debate about the need to provide bank financial aid packages, the EU’s own lending capacity was severely limited. The EU did not (and does not) have a Treasury per se. At the time, the Commission’s fund designed to provide short-term balance-of-payments funding for acute external financing problems within the EU had a very limited capacity. Established in 2002 the “Medium-Term Financing Facility” had capacity of just €12 billion89 and as of late 2008 it had not been used for 15 years.90 At the time, there was no EU intergovernmental agreement to boost the funds dramatically (in fact it was not until later in 2010 when Greece needed financial support that the EU established a rescue fund similar to that established in the US).

 Vaubel, R. 2006. Principal-agent problems in international organizations. Review of International Organisations, 1: 125–138. 88  Dreher, Axel, Lang, Valentin F., B. Rosendorff, Peter, Vreeland, James Raymond. 2018. Buying Votes and International Organizations: The Dirty Work-Hypothesis, CESifo Working Papers, Munich Society for the Promotion of Economic Research, November. 89  “Balance of Payments”, European Commission, Brussels. 90  Connolly, Kate and Traynor, Ian. 2008. “Hungary Receives Rescue Package, With Strings Attached”, The Guardian, 30 October. 87

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When Hungary faced the need for financial assistance in the first half of 2008, the EU led efforts to secure a joint €20 billion loan with contributions from the EU under its balance of payments assistance facility (€6.5billion), around €12.5 billion from the IMF under an IMF stand-by arrangement, and €1 billion from the World Bank.91 At the same time the Commission sought to increase the fund capacity to €25 billion.92 There was an even further problem: under the treaties balance of payments assistance from the EU was not available to Eurozone member states.93 This meant any future funding request from a Eurozone state would need to be provided through intergovernmental agreement and this would be lengthy and politically fraught for the larger member states. Latvia followed Hungry in needing help. Again there was recognition by the EU that any EU financial assistance would need to be supplemented by IMF resources. This was partly due to the magnitude of impending financial needs and partly because the IMF was in a position to move quickly in disbursing the initial instalments.94 In the initial discussions between the IMF, the Commission and Latvia, the issue of Latvia’s peg to the euro was raised.95 The IMF wanted Latvia to remove its peg and devalue its currency to make it more competitive. But from the EU’s perspective this was not negotiable. The banks from the Nordic states, and especially Sweden, had lent heavily to Latvia and would have been hit by any devaluation. Latvia was a candidate to join the euro; the EU’s goal was to facilitate its entry, not thwart it. For the Commission, the Eurozone’s credibility and cohesiveness were at stake. The Commission informed the IMF that EU funds would also be provided and a package of financial assistance that involved funding from the Nordic states was put together. The Nordic states had the greatest financial interest in Latvia’s stability and were concerned instability in the region could undermine their interests in other eastern European countries where they also had high exposures. A €7.5 billion plan was announced in December 2008, comprising €3.1 billion from EU member states; €1.7 billion from the IMF; €1.9 billion from Sweden, Denmark, Finland, Norway and Estonia; €0.4 billion from the World Bank; and €0.4 billion from the European Bank for Reconstruction and Development, Czech Republic and Poland.96 The IMF compromised on the issue of Latvia’s peg to the euro and a range of other structural measures was negotiated including cuts in public sector wages and other state spending, raising its value added tax rate from 18% to 21% and keeping its budget deficit below 5% of gross domestic product for the following year.97 Around the  “Financial Assistance to Hungary”, European Commission  “Commission proposes financial assistance to Hungary and an increase in overall BoP loans ceiling”, European Commission press release, 30 October 2008. 93  Hagan, op. cit. 94  Author interview with former economic adviser to the president of the European Commission, European Commission, Brussels, 13 July 2014; Hagan, op. cit. 95  Author interview with former Latvian government minister, Canberra, 11 September 2014. 96  “Post-Programme Surveillance for Latvia”, DG ECOFIN, European Commission, Brussels. 97  Author interview with former Latvian government minister, Canberra, 11 September 2014. 91 92

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same time the IMF entered into lending agreements to lend US$2.1 billion to Iceland and the Ukraine US$16.5 billion. Romania was also in “close dialogue” with the IMF about a loan in late October98 and it was clear to the Commission that Latvia would need financial assistance too. The only EU pool of funds that could be drawn upon were neither significant nor able to be tapped. This meant that EU states would have to agree to pool funds or extend loans in a coordinated manner. However, many member states were looking as though they would soon be in no position to support their own sovereign debt obligations let alone bail out their banking sectors, and with the larger member states already bailing out their own banks, funds were in short supply. The IMF has become known as “lender of the last resort” because countries typically turn to it when private sources of capital have turned their backs or when other governments or regional trading-bloc partners do not provide adequate help.99 At the outset, when the funds were needed most, the funds simply were not there. The IMF, however, was in a position to provide assistance quickly. It had also just ramped up its lending preparedness, creating a new US$100 million Short Term Liquidity Facility for short three-month loans in late October 2009.100 It was also widely considered that the IMF’s technical capacity and expertise in running assistance programs put it in the best position to deliver loans.101 It was also in the best position to coordinate and put financial packages in place, and expertise in surveillance.

EU Banking Interests in Europe A second European priority was that EU banks were very much in favor, especially in key member states, of intervention, but there was significant opposition among the voting populations in key states for direct support for the EU member states in financial trouble. EU banks had significant exposure throughout the EU and the value proposition for the EU to intervene to provide external financial support was very high. Germany and France — and the EU as a whole — had very significant financial interests in the future and likely financial rescue of EU member states in sovereign debt difficulties.102 The previous decades had seen marked growth in the level of cross-border  Brown, Adam. 2008. “Romania in ‘Close Dialogue’ With IMF, Not About Loan”, Bloomberg, 28 October. 99  Johnson, op. cit. 100  Davies, Bob; Walker, Marcus; Lyons, John. 2009. “IMF Creates $100 billion Fund to Aid Crisis Fight”, The Wall Street Journal, 30 October. 101  Author interview with DG ECOFIN representative, European Commission, Brussels, 11 February 2014; Author interview with representative of the International Monetary Fund, Brussels, 14 February 2014. 102  Author interview with former economic adviser to the president of the European Commission, European Commission, Brussels, 13 July 2014 98

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banking activity in Europe as a consequence of the roll out of single market liberalization. The introduction of the Single Banking License in 1989 under the Second Banking Directive, the consequent convergence in financial legislation throughout the EU and the introduction of the euro in 1999 led to cross-border banking exposure in Europe expanding dramatically.103 Overall cross-border interbank loans between euro area banks grew from 15.5% of total interbank loans in 1997, to 23.5% in 2008 and euro area banks’ holdings of debt issued by banks elsewhere in other euro area grew from 12.1% in 1997, to 31.3% in 2008.104 Among the banks most exposed to bad debt in the EU were German and French banks. While German and French banks had less exposure to Central and Eastern Europe, their potential for losses elsewhere in Europe was even greater. German and French banks were among the most global banks in the world in terms of having assets outside their home countries. The countries in the world in the second quarter of 2009 with the largest proportion of cross-border banking assets (that is assets outside their home countries) were France, Germany, the UK, the US, Switzerland and the Netherlands and together they accounted for 47% of all global cross-border banking assets.105 German banks were particularly exposed to EU member states in financial trouble. For example as of February 2011, German banks had €18 billion of exposure to the Greek public sector, €10 billion of which was sovereign debt. More than half the total amount was the result of loans to Greece made by Germany’s development bank KfW.106 German banks were most exposed to the sovereign debt of Italy and Hungary of any country and the second most exposed to the sovereign debt of Greece, Portugal, Spain and Italy (after those countries themselves respectively). French banks were particularly exposed to Italy (Table 8.3). At the same time German and French banks followed a different model to many other countries. Unlike the US and Switzerland for example that followed multinational models, where subsidiaries in numerous countries were funded by local operations, German and French banks followed a model under which subsidiaries were centrally funded by head offices. This meant their home country operations incurred losses directly. In some cases these losses were huge. Later in 2012 for example, at the height of the sovereign debt concerns in Europe, BNP Paribas, France’s largest bank, wrote down the value of its holdings of Greek sovereign debt by 75% and substantially reduced its sovereign debt outstanding by 29% — a move that generated €872 million in losses.107  Colangelo, Antonio and Lenza, Michele. 2013. “Cross-Border Banking Transactions in the Euro Area”, Bank for International Settlements, Basel; Allen, Franklin; Beck, Thorsten; Carletti, Elena; Lane, Philip R.; Schoenmaker, Dirk; and Wagner, Wolf. 2011. “Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies”, Centre for Economic Policy Research, London. 104  Franklin et. al., op. cit. 105  Ibid. 106  Bundesbank Statistics, Bundesbank, Frankfurt, 2 November 2014. 107  BNP Paribas. 2012. “Fourth Quarter Financial Results”, press release, 15 February. 103

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Table 8.3  German and French Banking Exposure to Sovereign Debt of Greece, Portugal, Spain, Ireland, Italy and Hungary vs. Domestic Banks’ Exposure in 2010 (in € millions) Country Greece Portugal Spain Ireland Italy Hungary

German Banks 18,718 10,888 31,854 12,922 72,717 8215

French Banks 11,624 4864 6592 2476 48,185 1881

Domestic Banks 56,148 13,707 203,310 5322 144,856 4931

Source: OECD EU Stress Tests and Sovereign Debt Exposure 2010, using OECD and respective bank data (Blundell-Wignall, Adrian and Slovik, P. 2010. “The EU Stress Test and Sovereign Debt Exposures”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 4, OECD Financial Affairs Division, Paris)

To make matters worse there was also the potential for massive losses as a result of the growth in cross-border mergers and acquisitions in the years leading up to the crisis. The number of branches EU banks had in other EU countries jumped from 557 in 2003 to 766 in 2009. Cross-border EU bank branches represented 79% of all foreign bank branches in EU countries as a whole, with EU branches holding assets worth €3.2 trillion in 2009 and non-EU bank branches holding assets worth €1.8 trillion.108 The level of assets EU subsidiaries held was even higher — €5 trillion worth of assets for EU subsidiaries versus €1 trillion for non-EU banks.

Domestic Considerations Thirdly, in addition to the implications for the banks of the leading member states, some states had other significant stakes in rejuvenating the financially troubled states through the IMF. As the crisis continued through to 2010 and 2011, there was significant resistance to coordinated intra-EU financial assistance packages at all as criticism of the southern EU member states escalated. Chancellor Angela Merkel maintained support for the IMF in Europe when the idea of extending EU assistance to southern European states particularly was deeply unpopular domestically.109 In 2010, her party faced an uphill electoral battle in electorally important parts of the country.110 Many of the larger member states’ banks had lent significantly to member states such as Greece, Portugal and Spain and were already suffering huge losses in the market collapse. Germany, for example, had a great deal to gain from Eurozone stability. It had been an export success story since the introduction of the euro in  Franklin et al., op. cit.  “Merkel Stands Firm on IMF Rescue for Greece”, BBC News, 25 March 2010. 110  Peel, Quentin. 2010. “Merkel Raises Defence Shields”, FT.com, 24 March. 108 109

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1999. While its success has been due to a range of reforms including the reduction in labour costs, its exports to the rest of the EU grew from 1999 to 2008 by 34% and its trade surplus a massive 135%.111 Its exports grew in every year to 2008 when the financial crisis hit. However in 2009, the year in which the financial crisis spread to EU member states, Germany’s exports dropped 18.4% — the biggest yearly drop since 1974. In 2009 exports comprised 42% of Germany’s GDP112 with more than two-thirds of its goods and services traded within the EU (the biggest trading partners in 2009 were France, the US, the Netherlands, Italy, Austria, and China respectively). In 2010 when the IMF was called in to help EU member states in trouble, German exports rebounded a strong 19%. Should the larger member states have extended bilateral loans to weaker debtor member states like Greece, Portugal and Spain and the latter governments defaulted, the domestic political backlash in the creditor member states could have been severe. Financial assistance packages were so unpopular that there were arguments about the legality under the EU treaties of EU member states providing sovereign financial assistance to other member states.113 Arguments were put forward that such assistance violated Articles 123 and 125 of the Treaty on the Functioning of the European Union (TFEU).114 A group of law professors launched a lawsuit before the German Constitutional Court challenging the validity of the initial Greek assistance, although the EU Council argued that assistance was justified based on Article 122(2) of the TFEU that allowed financial assistance to a member state under certain conditions.115 However, a dedicated intergovernmental treaty that amended the TFEU specifically authorized the establishment of a new EU financial assistance fund: the European Stability Mechanism (ESM). Entering into force in May 2013, it allowed the “granting of any required financial assistance” under the mechanism “subject to strict conditionality”.116 Furthermore, involving the IMF meant the largest EU member states were the lenders but avoided the political backlash that accompanied the imposition of IMF  Analysis of Destatis Database (Statistisches Bundesamt).  World Bank exports of goods and services (% of GDP). 113  Ruffert, Matthias. 2011. “The European Debt Crisis and European Union Law”, Common Market Law Review, 48: 1777–1806. 114  Article 125(1) TFEU states: “The Union shall not be liable for or assume the commitments of central Governments … of any Member State .. A Member State shall not be liable for or assume the commitments of central Governments .. of another Member State …” and Article 123 prohibits the purchase of debt instruments from “central Governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States”. 115  Article 122(2) of the TFEU states “where a member state is in difficulty or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, union financial assistance to the member state concerned”. 116  European Council Decision 2011/199/EU of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro, OJ L 91. 111 112

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loan conditionality, which were destined to be tough. Overall, the IMF was seen as the best choice to implement the tough economic restructuring needed. As Johnson has argued, the IMF specializes in telling its clients what they do not want to hear.117

EU States the Biggest Recipients of IMF Lending Given US and European interests in Europe and given that the US and European states dominate the IMF, it is not surprising that EU member states were the biggest recipients of IMF lending from 2008 to 2012. An analysis of all IMF lending from 2008 to 2011, when the Euro Crisis began to move to a less acute stage, shows that of a total of US$100,338,109 was loaned between November 2008 and May 2011, and approximately 55.6% of this went to EU member states. The figures also reveal that the other biggest recipients of IMF loans were three countries with particular strategic importance to the US: Pakistan, Iraq and its NAFTA neighbour, Mexico (Table 8.4).118 Table 8.4  Top Ten IMF loans in USD Value 2008 to 2011 Inclusive Country Mexico Portugal Greece Ireland Poland Ukraine Pakistan Romania Iraq Colombia Sri Lanka Latvia

Date of arrangement January 10 May 20 May 09 December 16 January 21 July 28 November 24 March 31 February 24 May 07 July 24 December 23

Year 2011 2011 2010 2010 2011 2010 2008 2011 2010 2010 2009 2008

Total amount agreed (USD) $29,722,313 $12,000,000a $16,612,681 $12,233,963 $12,045,544 $6,284,850 $4,547,655 $1,942,396 $1,493,783 $1,459,342 $1,039,263 $956,319

Note: Grey shading denotes EU member state Source: Analysis of IMF Lending data, International Monetary Fund a approximate

 Johnson, op. cit.  In respect to Pakistan, the US had various numerous “carrots” to wave when encouraging Musharraf to join the US campaign against terror and there have been accusations that one of those was the vote by the US that affirmed approval of the IMF’s loans to Pakistan. See Momani, Bessma. 2004. “The IMF, the US War on Terrorism, and Pakistan”, Asian Affairs, 31, No. 1, Spring.

117 118

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These figures support assertions that IMF lending is heavily influenced by geopolitical factors.119 Specifically, Thacker’s early argument that greater the political interest the US has in a country, the greater chance that country has of receiving a loan.120 Such figures don’t prove an alignment between US geopolitical priorities and IMF lending decisions; however, they provide strong empirical support for such a proposition. Additionally, the fact that geopolitical priorities are strong considerations has been acknowledged by a former IMF managing director.121 The ECB itself has suggested that such considerations were “an important factor” particularly in respect to the use of IMF Stand-by Arrangements.122 US Treasury is upfront about the degree to which the IMF represents US interests. The IMF, it says, is a “vital tool in our national security toolkit” and “keeps our allies and partners strong”.123 Some IMF staff also concede that the political priorities of the largest contributing countries have some influence on the IMF’s lending decisions.124 At the time of the financial crisis these allies and partners were located very much in Europe, notably financially.

The EU’s Political Interest Further it is also not surprising that given the strong European interests in financial stability in Europe, the interest of the key member states — particularly Germany and France — and the interests of the EU as a whole led to larger funding pledges for the IMF from the EU itself. In fact, the largest contributor to the US$500 billion actually raised as of August 2013 was the EU followed by the US. As of 5 August 2013, the EU then the US, followed by Japan, China, Norway, Canada, Switzerland, South Korea, Russia, Brazil, India, Australia, Chile and Singapore had committed funds to boost the IMF’s lending capacity (Table 8.5).125  Copelovitch, Mark. 2010. The International Monetary Fund in the Global Economy: Banks, bonds, and bailouts Cambridge University Press, Cambridge.; Chauvin Depetris, Nicolas, and Art Kraay. 2007. “Who Gets Debt Relief?”, Journal of the European Economic Association 5: 333–42; Copelovitch, M. S. (2010). Master or servant? Common agency and the political economy of IMF lending. International Studies Quarterly, 54: 49–77; Dreher, A., Sturm, J.-E., & Vreeland, J. R. (2015). Politics and IMF conditionality. Journal of Conflict Resolution, 59(1): 120–148. 120  Thacker, Strom. 1999. “The High Politics of IMF Lending”, World Politics, 52. 121  De Rato y Figaredo, Rodrigo. 2004. “The IMF at 60-Evolving Challenges, Evolving Role”, remarks at “Dollars, Debts and Deficits-60 Years after Bretton Woods” Conference Madrid, Spain, 14 June. 122  Reynaud, Julien and Vauday, Julien. 2008. “IMF Lending and Geopolitics”, European Central Bank, Working Paper Series No. 965, Frankfurt, November. 123  Earnest, Natalie Wyeth. 2014. “Myth vs. Fact: Why IMF Quota and Governance Reforms are Urgently Needed”, Treasury Notes, US Treasury; Author interview with representative of the International Monetary Fund, Brussels, 14 February 2014. 124  Ibid. 125  “Bolstering the IMF’s Lending Capacity”, International Monetary Fund, 5 August 2013. 119

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Table 8.5  IMF Signed Lending Agreements as of August 2013 Country EU member states (total) United States Japan China South Korea Russia Brazil India Canada Switzerland Australia Norway Singapore Chile TOTAL

Value of Funding Agreement $178 billion $100 billion $100 billion (up to) $50 billion (at least) $10 billion (up to) $10 billion (up to) $10 billion (up to) $10 billion $10 billion $10 billion $6 billion $5 billion $2 billion $2 billion $501.3 billion

Proportion of Total Funding 36% 20% 20% 10% 2% 2% 2% 2% 2% 2% 1% 1% 0% 0%

Source: International Monetary Fund

In total, the IMF’s loans to EU member states comprised just under half (46.02%) of the IMF’s total US$95,148,075 lending over the four-year period from 2008–2011. EU member states borrowed US$43,790,903. Thus EU member states were both the biggest recipients of the IMF’s lending (as the earlier table shows) and the collectively biggest lenders.

Securing Key Member State Interests Another (controversial) consequence of the crisis was that the largest creditor states played the most pivotal role in shaping institutional and political outcomes. As a consequence of its leading economic position in the EU, Germany was able to claim a centre position in the management of the crisis.126 In June 2010, a new EU financial assistance fund was established to be headed by a German. The European Financial Stability Facility (EFSF), a company established in Luxembourg and owned by Eurozone states, was headed by Klaus Regling, a former Director General of the European Commission’s Directorate General for Economic and Financial Affairs who had previously worked at the IMF and the German Ministry of Finance. The EFSF had staff of around 60 people, with such a “lean structure”, as the Commission puts it, possible because the German Debt Management Office and the European Investment Bank provided direct front and back office support to the

 Author interview with DG ECOFIN representative, European Commission, Brussels, 11 February 2014.

126

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EFSF”.127 As such the German Debt Management Office directly provided critical services such as asset liability management that alleviated the resources pressure on the EU and placed it at the centre of EFSF decision-making. In fact, Germany’s large economy and large surplus placed it in an increasingly indispensable position to help resolve the sovereign debt crisis in Europe. Germany for example gained the pivotal position in deciding whether the strict austerity conditions in Europe would be tightened or relieved. For example, later on in the crisis in negotiations prior to a Heads of Government EU summit where an extension to the EU’s own financial assistance fund was discussed, Spain’s government told its negotiators to “go easy” on their own demands for austerity relief so as not to upset Germany, whose support for further financial assistance was seen as pivotal.128 In these particular negotiations, even though Germany had originally argued for tougher conditions, it agreed to ease the conditions for receiving aid from the ESM financial assistance fund. One media article in the midst of the sovereign debt crisis in 2012 even claimed that “the most important conversations take place with the German government and the European Central Bank in Frankfurt  — not the European Commission”.129 Indeed Merkel saw Germany’s role as at the centre of the EU. Speaking in Bruges in October 2011 she said Germany had “a particular responsibility for our continent”. She criticised the “community method” of decision-making, saying that “it sometimes seems to me that the representatives in the European Parliament and in the European Commission see themselves as the sole true champions of the community method” and distinct from the intergovernmental method. By the intergovernmental method she meant the decision-making capacity that member states exercise in the EU Council and the European Council. She argued the community method could only be applied in those areas where the EU actually has competence and, as such, intergovernmental decision-making should not be forgotten. The speech was arguably a veiled effort to re-assert member state authority over EU decision-making, notably the Commission. Given Germany is the EU’s largest economy, the speech was also an effective assertion of Germany’s position at the top of the EU food chain.130 It should be emphasized that it was not just Germany that led the crisis solution efforts in Europe, nor Germany that exercised control over political and economic outcomes. Other leading states also played a leading role. However, Germany’s role highlights the degree to which the largest financial contributors to the solution, were also the most prominent managers.   “European Financial Stability Facility FAQs”, European Financial Stability Facility, Luxembourg. 128  Author interview with representative of a EU member state Permanent Representation office, Brussels, 25 July 2012. 129  Rachman, Gideon. 2012. “Welcome to Berlin, Europe’s New Capital”, Financial Times, 22 October. 130  Merkel, Angela. 2010. “Speech by Federal Chancellor Angela Merkel at the opening ceremony of the 61st academic year of the College of Europe”, College of Europe, Bruges, 2 November. 127

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Conclusion Taking the lead in negotiations, the US and the EU in shaping a role for the IMF in providing financial support to EU member states during the financial crisis, served their economic, financial and political interests, as the largest shareholders in the IMF. In the US, it also served the interests of key stakeholders including private financial firms in Wall Street, working through the G7 and the G20 process, the IMF’s role was largely pre-determined in that a set of preferences and priorities combined with entrenched norms and values created a powerful template off which negotiations would take place. Another outcome was that the biggest contributor to the IMF were the biggest beneficiaries, politically, economically and financially. The US benefited by securing its economic and financial interests and the key creditor member states in the EU benefited by securing their likewise interest as well as by playing a leading role in managing outcomes. As such, an examination of the role of the US and the EU played in defining, shaping and leading a role for the IMF in the financial crisis of 2008–09 and then into the subsequent euro crisis reveals strong support for several previously asserted propositions. These include that IMF lending is heavily influenced by geopolitical factors,131 that the greater the political interest the US has in a country, the greater chance that country has of receiving a loan,132 and that the probability of the need for financial assistance increases as a creditor country’s economic or political exposure to a crisis country increases.133

 Copelovitch, Mark. 2010. The International Monetary Fund in the Global Economy: Banks, bonds, and bailouts, Cambridge University Press, Cambridge; Chauvin Depetris, Nicolas, and Art Kraay. 2007. “Who Gets Debt Relief?”, Journal of the European Economic Association 5: 333–42; Copelovitch, M. S. (2010). Master or servant? Common agency and the political economy of IMF lending. International Studies Quarterly, 54: 49–77; Dreher, A., Sturm, J.-E., & Vreeland, J. R. (2015). Politics and IMF conditionality. Journal of Conflict Resolution, 59(1): 120–148. 132  Thacker, Strom. 1999. “The High Politics of IMF Lending”, World Politics, 52. 133  Schneider, Christina J. and Tobin, Jennifer L. 2020. The Political Economy of Bilateral Bailouts, International Organization, 74, Issue 1, Winter 2020: 1–29. 131

Chapter 9

Conclusion

Two comments in this book stand out and to some degree sum up the US and EU relationship  and the impact it has on global financial governance. In 1989, US Secretary of Commerce Robert Mosbacher suggested that the US should be given “a seat at the table” as an observer of internal EU discussions about European standards setting1. This comment came at a time when the then-European Community’s single markets program was leading to a diverging EU-US standards environment that was creating technical and cost problems for US firms. In many ways it sums up US objectives in Europe so far as regulatory cooperation was concerned: the need to shape EU outcomes in a way that accommodates US interests. The other comment comes from the text of an agreement that sought to “strengthen transatlantic economic integration” and hasten a cooperative work program in the areas of intellectual property rights, investment, secure trade, financial markets, and innovation. In the Framework for Advancing Transatlantic Economic Integration Between the United States of America and the European Union in April 2007 the US and the EU agreed to having “recogniz[ed] that the transatlantic economy remains at the forefront of globalization, and that the United States and the European Union are each other’s most important economic partners”2. This statement highlights the degree to which the US and the EU acknowledge their cooperation, in numerous areas shapes global governance. Both recognize that what they decide, between them, to a large degree determines global governance outcomes and hence the shape of rules applied in major industrialized economies throughout the world. 1  Peterson, John. 1996. Europe and America: The Prospects for Partnership, Routledge, New York: 47; Pine, Art. 1989. “The White House Softens Its Tough Trade Rhetoric”, Los Angeles Times, June 4, 1989. 2  “Framework for Advancing Transatlantic Economic Integration Between the United States of America and the European Union”, press release White House, April 30, 2007.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5_9

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This in short has been the theme of this book. It aimed to follow the trail of regulatory US-EU cooperation at various levels  — bilaterally in intergovernmental, transgovernmental and transnational channels and multilaterally in global fora — and discuss the effect on global financial governance. It did this by examining these channels in detail, discussing the actors, the key developments, the patterns, the cause and effect and presenting case studies on each area, with transgovernmental and transnational largely combined. As mentioned at the outset, this book also focused on financial markets regulatory cooperation particularly during the financial crisis in 2008–2009 as it represented a period of notable intensity. As part of a coordinated and urgent effort to restore financial stability and create long overdue reforms that would inspire markets confidence and (hopefully) prevent a repeat of the problems in the future, the US and EU sought to coordinate a response, first bilaterally and then in global fora such as the G7 and G20. Overall, this book had four broad objectives; to contribute to literature by discussing in one volume the major channels by which the US and the EU cooperate on financial markets policy not only in respect to intergovernmental and transgovernmental cooperation and the involvement of transnational actors but also in respect to cooperation in multilateral fora. It also sought to discuss the key forms of cooperation involved in regulatory cooperation so far as it relates to financial markets cooperation, to show how this cooperative relationship intensified during the global financial crisis in 2008–2009, and to show how the US and EU sought to work in multilateral fora to coordinate a response to the crisis.

Key Findings Transatlantic relations have evolved considerably from the early postwar years in which the US was intimately involved in European construction after the war and the nascent process of European integration. The construction of supranational European institutions, in which the US was integral, put in place a profound process that led to the European Union as known today, but also created a challenger to the US in terms of standards-setting. In a world of rapid industrial recovery from the war, globalization, and relaxation of capital flows, the expansion of multinationals around the world with banks in tow facilitated a new era of international rulemaking. In the area of banking and financial markets, representatives of banks and financial institutions were instrumental in this process, one which led to the need for greater inter-regulator cooperation. At the same time, changes in the dynamics of multilateralism — the evolution of regionalist projects, changing US trade preferences, the rise of the EU on the international stage  — triggered greater US-EU engagement on bilateral regulatory issues. In the late 1990s and early 2000s, it was the increasingly harmonized European financial regulatory landscape that prompted a rethink about financial markets cooperation on a bilateral basis.

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By the 1990s, financial markets issues had moved up  the transatlantic political  agenda. Successive intergovernmental agreements, notably  the Transatlantic Declaration in 1990, the New Transatlantic Agenda in 1995 and the Transatlantic Partnership in 1998, consolidated the US-EU relationship, setting the basis for further cooperation and eventually a broad framework for regulatory cooperation. Effectively setting the political priorities, they reinforced the role of heads of state and the intergovernmental channels of cooperation in transatlantic relations broadly and in respect to regulatory cooperation. It was not until the early 2000s, under the framework of the TEP, that financial markets regulatory cooperation between the US and the EU became institutionalized with the Financial Markets Regulatory Dialogue (FMRD) in 2002.

Transatlantic Cooperative Patterns During this decade, so far as transatlantic relations go, a pattern emerged. At intergovernmental level, heads of state negotiations tackled the “bigger picture” — the framework by which overall transatlantic cooperation on a range of issues would take place. The successive non-binding agreements un the 1990s set the agenda, outlined the principles, established the priorities, committed to regular dialogue and information exchange, mutual assistance on enforcement issues. At the same time, regulators, having already established their own channels of communications and agreements, performed a number of functions: exchange of information on regulatory proposals, exchange of information and assistance in respect to regulatory enforcement, problem identification and sharing of industry concerns. Regulators suggested remedies, discussed preferred regulatory approaches and ultimately created and negotiated policy proposals. With input from industry and transnational actors, policy details were largely formed at this level. On many policy issues discussed in the cooperative framework created by the successive agreements in the 1990s, regulators effectively took over, with subsequent annual FMRD meetings involving regulators from the US SEC, CFTC, US Treasury and private sector representatives in the US side, and representatives from the Commission, notably DG MARKT (Directorate-General for Internal Market), on the EU side. It has to be remembered that the European Commission has the sole right of legislative initiation under the EU treaties. As such, US officials at the FMRD and in other fora were negotiating directly with the policymakers at EU level. On the EU side, the Commission developed legislative proposals independently but also worked with member states which also suggested policy. The financial crisis as discussed in Chap. 5, was a period of particularly intense cooperation as the EU and the US coordinated a bilateral agenda for reform that ultimately was taken to the G7 and the G20. It was a period, as discussed earlier, in which US and EU regulatory officials were engaged in “a constant dialogue at working level” and held a “shared understanding of the need to avoid disruptions in

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the market that are extremely costly”3. This manifested in not just information sharing, mutual recognition agreements and harmonization, but also regulatory equivalence, the institutionalization of regulatory cooperation through formal dialogue and the use of successive non-binding intergovernmental agreements. The FMRD was a particularly important focal point for policy negotiations.

International Dimension Conclusions as to the patterns observed since the 1990s are consistent with those already discussed in literature, however, financial markets issues created a new dimension: international. At the same time regulators on both sides of the Atlantic were consolidating bilateral cooperation, they were also working together in international fora to build upon other financial standards and establish new ones. This effective paradox, in which US and EU regulators were cooperating on a bilateral basis under the apparent close relationship, they were increasingly competing in the international sphere as a consequence of the EU’s rise in the domain of international standards setting. Indeed, while US engagement in the international sphere was part of the SEC’s broader international outreach program, as discussed in Chap. 7. Similarly, the EU has established a number of third country financial markets regulatory dialogues. In the transatlantic context, this international dimension also has other significance, namely the degree to which an effective US-EU alliance shapes international financial governance. Equally significant cooperation took place during the financial crisis between the US and the EU in multilateral fora, notably on issues to do with transatlantic and international financial stability, funding for state financial assistance mostly in the EU, and in respect to post-crisis economic reform surveillance and management of an international regulatory reform agenda. As with bilateral US-EU cooperation, this was the case in respect to the intergovernmental as well as transgovernmental contexts. In the former, US-EU cooperation resulted in an effective alliance in multilateral fora such as the G7, G8 and G20 as well as in international financial institutions, notably the IMF. Arguably fora such as the G7 and G8 had become effective steering committees for the G20. The strategy of defining the issues, negotiating many of the details first among a smaller group of nations (in this case predominantly the US and European nations, with the exception of Canada and Japan in respect to the G7) before seeking support and consensus at the G20, had the effect of transporting US and EU preferences into the post-crisis regulatory reform agenda.

 Author interview with US Treasury representative, Brussels, 14 February 2014.

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Significance of Findings

241

A Defacto US-EU Alliance A defacto US-EU alliance also had the effect of shaping the institutional environment. Despite hopes for a new Bretton Woods system after the financial crisis and reform of the international system of global governance — something developing nations and non-US and non-European nations had been demanded for some time — the result was more of the same. Even some G20 leaders had proclaimed the need for major reform. As had been the case previously, the IMF’s role was invigorated during a crisis, its role having typically ebbed and flowed according to its need in the international economy. Such US and EU hegemony in respect to the IMF is not new. However, how the US and EU defacto alliance plays out in such situations is cause for debate. A further goal of this book was, in the course of highlighting patterns and as part of an effort to understand the drivers of transatlantic cooperation, to show how the transatlantic cooperative relationship intensified during the crisis. Financial markets encompass a very wide set of sectors and, in the area of banking, some research has suggested cooperation decreased in this period4. The fact is that a lot of banking specific rules, such as capital/prudential requirements, are largely imported from the international standard setting agencies. In other areas, notably in areas in which the EU developed post-crisis financial markets legislation, this book found cooperation intensified significantly. This was clear from interviews conducted with regulatory participants at the time. This intensification was also the case in respect to cooperation in multilateral fora, including the G7 and G20 and on issues dealing with international financial institutions like the IMF and FSF/FSB, whose policy environments are also multilateral.

Significance of Findings Transatlantic financial markets regulatory cooperation is a niche topic but arguably literature in this area has not dealt with it in a way that is commensurate with the impact on world markets of the US-EU relationship. Given this relationship is at the very centre of global financial governance, the degree to which US and EU negotiations shape global governance outcomes has a range of implications. As discussed in earlier chapters, scholarly research has focused on US hegemony in international financial governance, the role of the EU as an actor, the post-financial crisis institutional structure, the neoliberal nature of governance in this area, and the international politics of policy in particular financial sectors. Less attention has been accorded to how the US and EU relationship has been an effective incubator of international rules. This includes how US and EU preferences 4  Howarth, David; Quaglia, Lucia. 2016. The ‘ebb and flow’ of transatlantic regulatory cooperation in banking, Journal of Banking Regulation, suppl. Special Issue, 17, Issue 1–2: 21–33.

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converge and intersect during negotiations to set the institutional and regulatory agenda. US and EU economic and political goals, regulatory priorities and domestic preferences are effectively transposed into the global economy. In this respect, the focus in this book on US-EU intergovernmental and transgovernmental cooperation and on US-EU cooperation in international fora during the financial crisis of 2008–2009 highlights the impact of the transatlantic relationship on global financial governance generally.

Limitations As discussed at the outset, there were questions this book didn’t cover. First of all, the transatlantic relationship has developed significantly since the period around the global financial crisis. The program of legislative reform in the EU notably and also in the US after the global financial crisis kept legislators busy, with an expansive legislative agenda unfolding in the EU after the successive G20 summits in 2009 and 2010. The G20 has continued to act as the world’s steering committee so far as a global regulatory agenda goes, including in respect to financial markets regulation. Other issues have tended to dominate the agenda since, notably climate change and its profound  implications. A major development in the US-EU relationship since the financial crisis was the proposal for a Transatlantic Trade and Investment Partnership (TTIP), the negotiations for which commenced in 2013. Intended to be largely a trade deal, it created significant controversy over its scope but also specific provisions, not the least because  the proposal included an investor-state dispute settlement provision which would have allowed corporations to sue governments for lost future benefit in the event of a change in regulation. The TTIP never progressed, with US president Donald Trump pulling out of the deal. A new US president Joe Biden may revitalize something that resembles the TTIP but time will tell. There were also limitations in this book in respect to the degree to which particular financial sectors or financial domains were concerned. The major financial sectors are sometimes regarded as banking, securities and insurance. Each of these is huge and not all could be discussed in just one book. Equally, as noted at the outset, the financial markets encompass the capital markets, securities derivative markets, currency markets, commodities trading and assets management among others. As this book hasn’t examined these sectors in detail, it is entirely possible that patterns may diverge in these sectors. Standards-setting and policymaking is quite likely even more heavily dominated by regulators and industry actors for example. Literature has also extensively discussed many of the issues raised in this book that were not examined in further detail. These include a normative analysis of the relationship. Such an analysis would deal with questions such as whether regulation has contributed to best practice outcomes, whether the US-EU cooperative relationship has delivered substantive outcomes, and to what degree an effective defacto US-EU alliance contributes to good governance for the world. Such questions have been taken up in literature elsewhere, however.

Further Questions

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Further Questions The findings in this book raise other questions that are particularly worthy of future examination. The first of these is that since the emergence of scholarly discussion as to the nature of the US-EU relationship in the 1990s, very little attention has been given to it since then. More specifically, since scholars in the 1990s and early 2000s considered whether the transatlantic relationship could be considered a form of governance, even a form of experimental governance5 or even a form of regionalism6, little has been written since to explore this idea. Of course, in the context of regionalism studies, the transatlantic relationship has no supranational authority and the key frameworks agreements established in the 1990s are not legally binding. There seems to be no political desire on the part of the US or the EU to expand beyond existing security frameworks such as NATO, or trade or regulatory cooperation, with the TTIP having failed as an initiative as discussed. The transatlantic relationship is arguably not a form of regionalism but it is a form of governance that stands alone. It is, as the US and the EU have pointed out previously, a deep multi-issue, highly complex and highly interdependent relationship that is worthy of much greater examination. A further major issue raised is the degree to which a defacto US and EU alliance has shaped international financial governance in recent decades. As discussed in this book, it was the late 1990s that truly saw financial regulatory cooperation emerge as an issue on a bilateral basis. It followed the ascendency of the EU onto the global stage as an actor and even co-hegemon in respect to financial governance. This ascendency has been well examined as has US historical hegemony in this domain. This book answers some questions as to how the US and EU work together in this area, particularly during the financial crisis. Given both have repeatedly pledged to work together on global fora, how successful has this been? Do what degree can they in fact be regarded as allies in global finance governance? Are they instead antagonists? To what degree to their interests align? Do they align to a greater degree than for example those of the US and Japan? How has the emergence of other powers like China changed the dynamic? An examination of these questions has implications around power and also legitimacy. This is a further question that this book raises. Issues to do with legitimacy in global governance have been well discussed in literature7. Concerns about 5  Pollack, Mark A and Shaffer, Gregory. 2001. Transatlantic Governance in Historical and Theoretical Perspective, Rowman and Littlefield, Oxford: 29. 6  Mavroidis,  Petros C. 2001. “Transatlantic regulatory cooperation: Exclusive Club or Open Regionalism?”, in George Bermann, Matthias Herdegen and Peter Lindseth (eds.), Transatlantic Regulatory Cooperation: Legal Problems and Political Aspects, Oxford University Press, Oxford: 263–270. 7  Coleman, William D. Porter, Tony. 2000. International Institutions, Globalisation and Democracy: Assessing the Challenges, Global Society, 14, 3: 377–398; Injoo Sohn. 2005. Asian Financial Cooperation: The Problem of Legitimacy in Global Financial Governance, Global Governance,

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legitimacy emerged in parallel with the rise of non-state actors in policy itself8. In respect to global financial governance, scholars have examined the diffusion of power in respect to the international monetary system9 as well as the financial markets more broadly. Underhill and Zhang for example argued that that financial globalization has bolstered the role of private actors in financial governance, made regulators more dependent on market interests, increasingly aligned financial governance with the preferences of powerful market players, and strengthened the power of private agents to shape and set rules10. Examining specific cases in financial governance, including the Basel Committee on Banking Supervision (BCBS) and asked for whom the committee’s global financial and supervision programs seek to work. They asked similar questions in respect to IOSCO the securities standards-­setting organization. Other scholars have focused not so much on the institutions but on the policy output and the degree to which substantive outcomes are representative. Admitting assessing this is problematic, Mügge argues scholars should instead consider the desirability of specific policy outcomes and distribution of and benefits when discussing institutional legitimacy11. Any discussion about legitimacy inevitably runs into complex questions of power, notions of justice, fairness, issues to do with qualitative outcomes, representation and participative democracy. This is an important area of research, not the least because for most people, for most sections of society, and even most countries, input into global financial rules is far out of reach. At the same time, as shown in this book, they affect countries and hence populations that often have very little input at all. As discussed earlier, reforms have been affected in several international financial institutions in recent years including at the G20, IMF, FSB, IOSCO among others. There is an obvious need for benchmarking, measurement and assessment in respect to global governance reform in this respect. As discussed at the outset, few 11, No. 4: 487–504; Geoffrey R D Underhill & Xiaoke Zhang. 2006. “Norms, Legitimacy, and Global Financial Governance,” WEF Working Papers 0013, ESRC World Economy and Finance Research Programme, Birkbeck, University of London; Underhill, Geoffrey R.  D. and Zhang, Xiaoke. 2008. Setting the Rules: Private Power, Political Underpinnings, and Legitimacy in Global Monetary and Financial Governance, International Affairs (Royal Institute of International Affairs, 84, No. 3: 535–554; Randall D. Germain. 2011. Global Financial Governance and the Problem of Inclusion, Global Governance, 7, No. 4: 411–426; Mügge, Daniel. 2011. Limits of Legitimacy and the Primacy of Politics in Financial Governance, Review of International Political Economy, 18, No. 1: 52–74; Brassett, James and Tsingou, Eleni. 2011. The Politics of Legitimate Global Governance, Review of International Political Economy, 18, No. 1: 1–16 8  Slaughter, Anne-Marie. 2001. “The Accountability of Government Networks”, Indiana Journal of Global Legal Studies, 8, Issue 2, Article 5. 9  Cohen,  Benjamin J. 2008. “The International Monetary System: Diffusion and Ambiguity”, International Affairs, 84: 3: 455–470. 10  Underhill, Geoffrey R. D. and Zhang, Xiaoke. 2008. Setting the Rules: Private Power, Political Underpinnings, and Legitimacy in Global Monetary and Financial Governance, International Affairs (Royal Institute of International Affairs, 84, No. 3: 535–554. 11  Mügge, Daniel. 2011. Limits of Legitimacy and the Primacy of Politics in Financial Governance, Review of International Political Economy, 18, No. 1: 52–74.

Further Questions

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scholars have sought to assess and measure levels of transatlantic cooperation. Quaglia found the transatlantic cooperation in the area of banking regulation decreased after the global financial crisis, although empirical evidence presented in this book suggests this was not the case in respect to other key areas of financial markets regulation, including negotiations over the European Market Infrastructure Regulation (EMIR) that set new post-financial crisis rules on OTC derivatives, central counterparties and trade repositories that materialized as Regulation (EU) No 648/2012, or negotiations on the Directive on Markets in Financial Instruments in 2011 and 2012. This is one area that has not been given sufficient weight.

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Index

A Accounting Standards, reform of, 9 Agenda-setting, 77, 92, 100, 180–181 Almunia, Joaquín, 79, 81 American Depository Receipts (ADRs), 45, 126 Arthur Andersen, 45, 126 Asian Financial Crisis, 185, 201, 212, 214 Atlantic trade relationship, 26, 38, 242 B Baker, James, 29, 57, 58 Bank for International Settlements (BIS), 105–108, 111, 112, 156, 157, 168, 169, 173, 177, 178, 197, 199 Banking Committee of Banking Supervision (BCSC), 6, 178 Banking supervisory authorities, 42, 114, 170 Barroso, José Manuel, 66, 83, 91, 92, 96, 138, 198, 218 Basel capital standards, 22, 188 Basel Committee on Banking Supervision (BCBS), emergence of, 170 Basel Committee on Banking Supervision (BCBS), governance of, 244 Basel III negotiations, 174 Bear Stearns, 8, 78, 80, 155, 156 Berlin Blockade, 30 Bretton Woods, 15, 34, 36, 38, 69, 72, 101, 103, 105, 169, 170, 198, 201, 204–207, 241 Brown, Gordon, 71, 82–84, 90, 91, 101, 201, 217, 219

Bush, President George Herbert Walker, 57, 68, 70 Bush, President George Walker, 58, 66, 68, 71, 83, 84, 86–89, 91, 92, 95, 101, 138, 182, 198, 200, 216, 217, 222 C Capital controls, 54 Capital Requirements Directives (CRDs), 23 Carter, President Jimmy, 67 Central banking cooperation, 72, 105, 169 Choice of forum, 67, 100–101 Churchill, Winston, 30, 32 Clinton, President Bill, 60, 70, 222 Club dominance, 10, 168 Cold War, 30, 33, 36, 57, 69, 70 Collateralised debt obligations (CDOs), 78, 134, 150, 152, 154–156 Committee of European Banking Supervisors (CEBS), 45 Committee of European Securities Regulators (CESR), 45, 111, 139, 141–143, 148, 149, 156, 158, 159, 163 Committee on Payments and Market Infrastructures, 168, 173 Communist containment, 31 Company law directives, 43, 109, 145 Conference for European Economic Co-operation, 32 Convergence, 8, 9, 30, 64–66, 115, 120, 122, 126, 128, 142, 145–147, 150–154, 164, 166, 179–180, 200, 228

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 P. O’Shea, Transatlantic Financial Regulation, https://doi.org/10.1007/978-3-030-74855-5

279

280 Credit default swaps, reform of, 9, 133–166 Credit Ratings Agencies, reform of, 133–166 D Delors, Jacques, 58, 74 Derivatives markets, 95, 155–157, 160, 163–166 Derivatives, reform of, 163 Diplomatic relations, US-EU, 53 Directive on Markets in Financial Instrument (MiFID), 121 Directorate-General for Internal Market (DG Markt), 71, 104, 124, 129, 239 Dodd-Frank Wall Street Reform and Consumer Protection Act, 86 E Economic and Financial Affairs Council (Ecofin), 43, 85, 156 Economic Summits, 66–69, 87 Eisenhower, President Dwight David, 33, 34, 68, 69 Emergency Economic Stabilization Act of 2008, 86, 151 Enron, 45, 126, 135, 146, 148 Epistemic communities, 73 Equivalence, 8, 49, 113, 115, 117–122, 132, 137, 140–144, 151, 154, 166, 240 EU Summits, 43, 53, 62, 90, 181, 195, 218, 234 Euro-Atlantic architecture, 29, 57–59 Euro Crisis, 8, 131, 186, 230, 235 Eurogroup Working Group (EWG), 85 Eurogroup, ascendency of, 86 Euro, introduction of, 62, 112, 146, 228, 230 European Atomic Energy Community (Euratom), 6, 33 European Central Bank (ECB), influence of, 112 European Coal and Steel Community (ECSC), 6, 11, 32, 33, 51, 53, 54, 56 European Commission, 17, 35, 36, 39, 53, 54, 56–59, 62, 64–66, 71, 79, 81–84, 95, 96, 99, 100, 104, 108–112, 119, 121–124, 126–131, 146, 149, 152, 162, 163, 181, 183, 186, 191, 195, 197, 198, 207, 210, 211, 233, 234, 239 European Community (EC), 33, 35–39, 42, 57, 58, 69, 108, 114, 115, 121, 145, 176, 206 European Council (EU Council), 43, 52, 53, 58, 59, 66, 91, 95, 161, 162, 195, 211, 230, 234

Index European Defence Community, 53, 56 European Economic and Monetary Union, 60 European Economic Community (EEC), 5, 6, 11, 20, 32–37, 39–42, 51, 54, 56, 57, 59, 68, 70, 108–110, 119, 170, 178, 206 European Integration, 9, 11, 12, 19, 29, 31–35, 37, 51, 59, 60, 173, 199–200, 206, 238 European Market Infrastructure Regulation (EMIR), 22, 121, 166, 245 European Parliament, 36, 37, 53, 61, 81, 116, 121, 135, 139, 151, 162, 166, 234 European Securities and Markets Authority (ESMA), 104, 124, 140, 143–144 European Systemic Risk Board (ESRB), 112, 132, 165 European System of Central Banks (ESCB), 60, 112 Eurozone, 53, 85, 88, 90, 112, 131, 132, 137, 181, 186, 211, 215, 221, 222, 226, 229, 233 EU-US Summits, 46, 60, 64, 65, 127 F Fannie Mae, Freddie Mac, 80 FATF financial surveillance guidelines, 187 Federal Deposit Insurance Corporation (FDIC), 23, 52, 104, 111 Federalism, European, 30, 31, 33 Federal Reserve, 52, 79, 80, 104, 111, 124, 131, 138, 159, 161, 163, 183, 193, 214 Financial Action Task Force on Money Laundering (FATF), 168, 187, 188 Financial Markets Regulatory Dialogue (FMRD), 6, 23, 44–46, 49, 64–66, 71, 115, 116, 120, 123–132, 137, 138, 141, 144, 149, 151, 161, 163, 165, 166, 183, 239, 240 Financial Services Action Plan (FSAP), 43–44, 49, 123, 125, 127, 128, 187 Financial Stability Board (FSB), 65, 94, 165, 168–169, 182, 187, 188, 197–201, 214–215, 241, 244 Financial Stability Forum (FSF), 65, 88, 89, 94, 95, 99, 107, 169, 181, 192, 194–198, 201, 214, 216, 219, 241 Financial Stability Institute (FSI), 107 First Banking Directive, 114 Foreign direct investment, transatlantic, 37 Forms of cooperation, 5, 6, 18, 55–56, 122, 238 Fortress Europe, 57, 221 Francophone Summit, 91

Index G Geithner, Timothy, 80, 86, 131, 189, 222 General Agreement on Tariffs and Trade (GATT), 31, 33, 34, 39, 40, 118, 170 Generally Accepted Accounting Practices (GAAP), 41, 108–110, 121, 145–154 Global Financial Crisis, background, 78, 79 Globalization, 1, 2, 54, 237, 238, 244 Global solution, genesis of, vi, 83–84, 92, 102, 189 Gold Standard, 106, 169 Governance, global financial, 4, 10, 21, 24, 25, 168, 176, 187–189, 199–201, 219, 241–244 Governance, global financial, reforms to, vi, 4, 10, 21, 24, 25, 168–169, 176, 177, 187–189, 199–201, 219, 237, 238, 241–244 Governance, transatlantic, 2, 10–13, 17, 19, 20, 38, 52, 57, 59, 70, 107, 184, 243 Gramm-Leach-Biley Act, 45 Greece crisis, 131, 186, 229 Groupe de Contact, 170, 171 Group of Governors and Heads of Supervision (GHOS), 177, 178 Group of 8 Nations (G8), 55, 56, 58, 67, 70, 87, 93, 96, 97, 100, 168, 216, 240 Group of Nations (G7), 240 G20 Summit London April 2009, 86, 169, 189, 198, 217 G20 Summit Washington November 2008, 71, 129, 195 H Harmonization, 8, 11, 40, 108, 109, 114, 115, 119, 122, 145, 148, 166, 174, 201, 240 Hegemonic stability theory, 13 Hegemony, US and EU, 6 High-level Regulatory Cooperation Forum, 123, 127, 130, 132 Historical institutionalism, 9, 51, 75 Hungary crisis, 131, 219

281 IMF, US Veto, 209 Informal agreements, 8, 115, 117–118 Information exchanges, 5, 8, 44, 112, 115, 116, 132, 171, 183, 197, 239 Interdependence, 3, 4, 13–16, 29, 37–38, 46–49, 54, 70, 93, 103, 113, 190 Intergovernmentalism, 12, 52–55, 85 Intergovernmentalism, deliberative, 53, 85 International Accounting Standards Board (IASB), 94, 95, 109, 146–148, 150, 152–154, 168, 172, 173, 182, 187, 191, 194, 196, 199 International Association of Insurance Supervisors (IAIS), 65, 94, 108, 168, 173–175, 187, 198, 199, 201 International Bank for Reconstruction and Development (IBRD), 205, 213 International financial institutions (IFIs), 5, 41, 53, 65, 74, 94, 99, 103, 108, 115, 167–170, 173, 175, 177–179, 185, 187, 189, 193, 194, 198, 201, 211, 212, 216, 217, 240, 241, 244 International Financial Reporting Standards (IFRS), 41, 109, 110, 121, 130, 145–151, 153, 154, 182 International Monetary Fund (IMF), 4, 5, 10, 53, 79, 80, 86, 88–90, 92–94, 98–100, 103, 131, 168, 170, 171, 178, 179, 181, 185–187, 192–197, 199–201, 203–235, 240, 241, 244 International Organization of Securities Commissions (IOSCO), 55, 94, 107, 108, 111, 135, 136, 138, 139, 152, 163, 168, 171–173, 175, 181, 182, 187, 188, 191, 194, 196, 200, 201, 244 IOSCO standards, criticism of, 188 J Juncker, Jean-Claude, 84 K Kennedy, President JF, 33, 34, 68

I IMF, and the EU, 99, 212 IMF, Executive Board, 209, 210, 212 IMF Financial Sector Assessment Program (FSAP), 187 IMF loans, 213, 223, 231 IMF Quotas, 208 IMF, reform of, 212 IMF, US-EU Dominance, 204, 215

L Latvia crisis, 131, 219 Lehman Brothers, 77, 78, 80, 81, 88, 102, 137, 150, 151, 157, 158, 191, 216 Liberal intergovernmentalism, 12 Long-Term Refinancing Operations (LTROs), 131

Index

282 M Maastricht Treaty, 32, 37, 60 Marshall Plan, 11, 31, 53, 69, 206 McCreevy, Charlie, 71, 130, 136, 137, 149, 159, 162, 191 Merkel, Angela, 66, 186, 216, 218, 219, 229, 234 Monetary independence, 35–37, 206 Monnet, Jean, 32, 33 Mosbacher, Robert, 41, 114 Most favoured nation (MFN) principle, 62 Multilateralism, 238 Mutual assistance, 17, 59, 109, 239 Mutual recognitions, 5, 8, 41, 42, 46, 47, 49, 57, 64, 108, 115, 118–120, 122, 149, 150, 152–155, 166, 240

P Paulson, Henry, 80, 82, 83, 86–89, 91, 160, 192, 216, 222 Policy networks, 19, 20, 26, 73 Power Balance, US-EU, 10, 26, 40, 168, 205 Presidential trips, 52, 66–68 Problematization, 189–190

N National treatment, 8, 112, 114, 115, 118 Neoliberal values, 58, 184 New institutionalism, 13 New Transatlantic Agenda (NTA), 13, 21, 26, 30, 60–64, 116, 117, 123, 128, 176, 239 New Transatlantic Marketplace, 58, 59 Nixon, President Richard, 35, 69, 70, 106 Norms, 7, 8, 24–26, 41, 74, 100, 175, 183–186, 200, 235, 244 North American Free Trade Agreement (NAFTA), 14, 40, 231 North American Treaty Organisation (NATO), 30, 59, 67–69, 243 North Atlantic Council, 67, 68 Norwalk Agreement, 109, 147

S Sarbanes-Oxley Act, 45, 126 Sarkozy, Nicolas, 83, 91, 92, 137–139, 186, 191, 196, 198, 218, 219 Schuman declaration, 32 Schuman, Robert, 32, 54, 57 Second Banking Directive, 42, 57, 70, 112, 114, 228 SEC Outreach, 124–125 Sectoral corporatism, 20 Sherpas, 55, 96, 160, 189 Single European Act, 37, 39, 70, 114 Social constructivism, 19, 74 Soft law, 18, 93, 123, 199, 200 Sovereign Debt, EU, 86, 229 Spillover, policy spillover, 183, 187 Spinelli, Altieri, 30 Standards setting, EU, 41, 114, 154, 174, 240 Stimulus programs, 195 Stock exchanges, 22, 24, 42, 45, 111, 113, 124, 126, 128, 149, 160, 183 Strauss-Kahn, Dominique, 88, 181, 186 Sub-Committee on IMF (SCIMF), 211 Supranational institutions, 6, 30, 51

O Obama, President Barrack, 8, 68, 70, 71, 86, 95, 163, 164, 219, 221 Office of the Trade Representative, 61 Oil crisis 1970s, 69, 106, 207 Organisation for Economic Co-operation and Development (OECD), 67, 93, 118, 123, 187, 229 Organisation for European Economic Cooperation (OEEC), 32, 53 Organization for Security and Co-operation in Europe (OSCE), 36 Organization of Arab Petroleum Exporting Countries, 35, 69, 106, 207 OTC Derivatives Regulators’ Forum, 161

R Reagan, President Ronald, 36, 67, 70, 221, 222 Realism, 12, 52 Regionalism, 13, 14, 243 Regulatory harmonization, 2, 5, 8, 200 Rossi, Ernesto, 30

T Technical assistance, 85, 123, 182, 183, 214 Technical experts, 129, 139 Time horizons, 101–102 Trade barriers, 42, 60, 61, 170, 204 Trade tensions, US-EU, 47, 48, 63, 220, 221 Transatlantic Business Dialogue (TABD), 61, 116, 130

Index Transatlantic Consumer Dialogue (TACD), 61, 116 Transatlantic Declaration (TD), 13, 29, 56, 58, 61, 64, 116, 117, 123, 176, 184, 239 Transatlantic drift, 58 Transatlantic Economic Council, 65, 71 Transatlantic Economic Partnership (TEP), 13, 30, 46, 56, 63–65, 72, 111, 116, 117, 123, 177, 184, 239 Transatlantic Legislators Dialogue (TALD), 61, 116 Transatlantic relations, emergence of, 9, 243 Transatlantic Trade and Investment Partnership (TTIP), 26, 242, 243 Transgovernmentalism, 18 Transnational, 2, 3, 5, 17, 19, 20, 26, 49, 66, 73, 74, 103–132, 238, 239 Treaty on European Union (TEU), 60 Treaty on the Functioning of the European Union (TFEU), 211, 230 Triffin Paradox, 35, 206 Triffin, Robert, 34, 35, 206 Truman Doctrine, 30 Truman, President Harry S., 30, 31, 66, 68, 206 Two-level game theory, 12 U US Bailout Plan, 82–83, 102, 151 US Congress, 30, 61, 82, 116, 120, 140, 143 US Department of Commerce, 47, 61

283 US-EU alliance, 102, 240–242 US-EU trade levels, 221 US Office of International Affairs (OIA), 181, 182 US Office of Management and Budget, 127 US President’s Working Group on Financial Markets (PWGFM), 159, 192 US Public Company Accounting Oversight Board, 45, 126 US Securities and Exchange Commission (SEC), 17, 45, 52, 59, 71, 104, 109–111, 113, 124, 125, 128, 130, 132, 134, 135, 137–139, 142–144, 146, 148–157, 159, 161–163, 171, 172, 181–183, 190, 191, 200, 239, 240 US Treasury, 65, 80, 84, 86, 104, 112, 117, 124, 127, 129–132, 138, 142, 160, 163–166, 183, 186, 191, 192, 210, 212, 216, 221, 222, 224, 232, 239 V Vienna Convention on the Law of Treaties, 55 W Washington consensus, 41, 185, 223 World Bank, 4, 20, 53, 88, 90, 93, 94, 98, 103, 169–171, 178, 181, 185, 187, 200, 205, 212, 213, 216, 222, 223, 226 World Trade Organization (WTO), 62–64, 108, 118, 123