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DIRECTORATE GENERAL FOR INTERNAL POLICIES

POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICIES

SPECIAL COMMITTEE ON THE FINANCIAL, ECONOMIC AND SOCIAL CRISIS

THE TRANSATLANTIC RELATIONSHIPIN THE AFTERMATH OF THE CRISIS

WORKSHOP

Abstract

This workshop aims to prepare CRIS Members for the upcoming visit of the US as well as for discussions on the draft interim report on "EU-US relations in the aftermath of the financial, economic and social crisis" in the Special Committee on the Financial, Economic and Social Crisis.

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This document was requested by the European Parliament's Special Committee on the Financial, Economic and Social Crisis.

EXPERTS

Peter Jungen, Chairman, Center of Capitalism and Society, Columbia University, New York

Joseph R. Mason, Hermann Moyse/LBA Chair of Banking at the Ourso School of Business, Louisiana State University, Baton Rouge, Louisiana

Frances G. Burwell, Vice president, Director to Transatlantic Relations and Studies at the Atlantic Council of the United States, Washington

Benoît Cœuré, Directeur général adjoint de la Direction Générale du Trésor (Department of Treasury), Paris

RESPONSIBLE ADMINISTRATOR

Arttu MAKIPAAPolicy Department Economic and Scientific PoliciesEuropean ParliamentB-1047 BrusselsE-mail: arttu.makipaa@europarl.europa.eu

Seconded National ExpertStephanie HONNEFELDERPolicy Department Economic and Scientific PoliciesEuropean ParliamentB-1047 BrusselsE-mail: stephanie.honnefelder@europarl.europa.eu

LINGUISTIC VERSIONS

Original: [EN]

ABOUT THE EDITOR

To contact the Policy Department or to subscribe to its newsletter please write to:poldep-esc@europarl.europa.eu

Manuscript completed in May 2010.Brussels, © European Parliament, 2010.

This document is available on the Internet at:http://www.europarl.europa.eu/activities/committees/studies.do?language=EN

DISCLAIMER

The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament.

Reproduction and translation for non-commercial purposes are authorized, provided the source is acknowledged and the publisher is given prior notice and sent a copy.

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Table of Contents

Programme................................................................................................................................................ 4

Curricula Vitae of Speakers............................................................................................................... 6

Presentations ........................................................................................................................................... 8

Joseph R. Mason .................................................................................................................................... 9

Frances G. Burwell .............................................................................................................................. 20

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DIRECTORATE-GENERAL INTERNAL POLICIES OF THE UNION- DIRECTORATE A -

ECONOMIC AND SCIENTIFIC POLICIES

Programme

Workshop on

EU-US relations in the aftermath of the financial, economic and social crisis

European Parliament, Brussels31 May 2010, 15.30-18.30, Room JAN 6Q2

Interpretation available

Chair: Wolf Klinz (MEP, ALDE), CRIS Chairman

A thorough evaluation of the crisis needs to look at the perspectives and potential of transatlantic cooperation. The way cooperation works in practice and a synopsis ofstrategies and solutions are crucial issues to look at. This workshop aims to prepare CRIS Members for the upcoming visit of the US as well as for discussions on the draft interim report.

15.30 - 17.00 Session I: Financial and economic crisis - transatlantic views and shared challenges

Topics discussed: EU and US initiatives and strategies to deal with the effects of the crisis

Discussions on systemic risk Discussions on key topics of financial markets

regulation Stimulation of the real economy Fostering employment

Experts:

Mr Peter Jungen Chairman, Center of Capitalism and Society, Columbia University, New York

Mr Joseph R. Mason Hermann Moyse/LBA Chair of Banking at the Ourso School of Business, Louisiana State University, Baton Rouge, Louisiana, Senior Fellow at the Wharton School, University of Pennsylvania, and a Partner at Empiris, LLC

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17.00 - 18.30 Session II: Stock-taking and prospects in institutional transatlantic cooperation

Topics discussed: Institutional setting of transatlantic cooperation, with view to the new Obama administration and the new Lisbon treaty

Cooperation between US Congress and European Parliament

Meetings of EU-US on the world scene (G 20, FSF, Senior Supervisor Group, ...)

Issues of the CRIS interim report, such as EU-US cooperation in view of global government reform, institutional setting of G 20

Experts:

Ms Frances G. Burwell Vice president, Director of Transatlantic Relations and Studies at the Atlantic Council of the United States, Washington

Mr Benoît Cœuré Directeur général adjoint de la Direction Générale du Trésor (Department of Treasury), Paris

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Curricula Vitae of Speakers

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Peter Jungen,

Chairman, Center of Capitalism and Society, Columbia University, New YorkPeter Jungen, Chairman of Peter Jungen Holding GmbH, is an entrepreneur and angel investor.Starting his career in industry 1987 he became CEO of Strabag AG, Köln one of the largest Civil Engineering Company Groups in Europe and led the successful restructuring efforts back to profitability before he became an entrepreneur.He is Co-Founder of or Investor in numerous start-ups in Europe and in USA, including Idealo Internet GmbH, the leading German prize comparison shopping platform, Berlin. He is a board member of New York Philharmonic and Member of the Advisory Council of Deutsche Bank AG.He is Chairman of the “Center on Capitalism and Society” of Columbia University (CCS), New York, member of the International Advisory Council (IAC) of Columbia University, New York, Member of the International Joseph A. Schumpeter Society.

Joseph R. Mason,

Dr. Mason is Professor of Finance and the Hermann Moyse/Louisiana Bankers Association Chair of Banking at the Ourso School of Business, Louisiana State University and Senior Fellow at the Wharton School.Dr. Mason’s academic research focuses primarily on financial crises and securitization, investigating liquidity in thinly-traded assets and illiquid market conditions. Current academic research projects analyze default risk, including both immediate and cross-default risk, and default resolution costs in the contexts of asset-backed securities, in systemic and non-systemic environments, as well as the efficacy of bailout and resolution policies through the history of financial markets. His research has been published in the American Economic Review, the Journal of Money, Credit, and Banking, the Journal of Banking and Finance, and many other journals and books.

Frances G. Burwell,

Vice president, Director to Transatlantic Relations and Studies at the Atlantic Council of the United States, WashingtonFrances G. Burwell is Vice President, Director of Transatlantic Relations and Studies at the Atlantic Council of the United States. Her areas of expertise include U.S.-EU relations and the development of the European Union's foreign and defense policies, and a range of transatlantic economic and political issues. She is co-author (with Daniel Hamilton) of Shoulder to Shoulder: Forging a Strategic U.S.-EU Partnership, and is the principal author or rapporteur of several Atlantic Council publications including Transatlantic Leadership for a New Global Economy; Transatlantic Transformation: Building a New NATO-EU Security Architecture; Law and the Lone Superpower: Rebuilding a Transatlantic Consensus on International Law; and The Post-9/11 Partnership: Transatlantic Cooperation against Terrorism. She is the co-editor (with Ivo H. Daalder) of The United States and Europe in the Global Arena. Prior to joining the Council, Dr. Burwell was executive director of the Center for International and Security Studies at the University of Maryland, and also served as founding executive director of Women In International Security.

Benoît Cœuré,

Benoît Coeuré is head of multilateral affairs, trade and development at the French Treasury, co-president of the Paris Club and G8 finance sous-sherpa for France.He has been chief economic adviser to the permanent head of the French Treasurybetween 1997 and 2002 and deputy CEO, then CEO of Agence France Trésor, theFrench debt management office, between 2002 and 2007.Mr Coeuré is a graduate of École polytechnique in Paris. He holds an advanced degree in statistics and economic policy of École nationale de la statistique et de l’administration économique (ENSAE) and a B.A. in Japanese.

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Presentations

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Presentation byJoseph R. Mason,

Hermann Moyse/LBA Chair of Banking at the Ourso School of Business, Louisiana State University, Baton Rouge, Louisiana, Senior Fellow at the Wharton School, University of Pennsylvania, and a Partner at Empiris, LLC.

Comments on EU-US Relations in the Aftermath of the Financial, Economic, and Social Crisis

Prepared for the Policy Department of the European Parliament, Special Committee on the Financial, Economic, and Social Crisis

31 May 2010

Dr. Joseph R. MasonProfessor and Hermann Moyse, Jr./Louisiana Bankers Association

Endowed Professor of Banking, Louisiana State University and

Senior Fellow, The Wharton School

Contact joseph.r.mason@gmail.com, (202) 683-8909 office. Copyright Joseph R. Mason, 2010. All rights reserved.

Introduction• EU and US initiatives and strategies to

deal with the effects of the crisis;• Approaches to systemic risk;• Topics in financial market regulation;• Stimulating the real economy and fostering

employment.

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EU and US initiatives and strategies to deal with the effects

of the crisis

Toxic POA Resets Ahead

We are here, amidst IO expirations

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After bank debt guarantees, bank CDS and sovereign CDS ↑

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1 21 41 61 81 101 121 1410

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Allied Irish BankBank of IrelandSovereign

5Gray, Dale. “Extracting Information from Market Prices for Modeling FinancialCrises and Sovereign Risk,”Wharton Roundtable Presentation, May 21, 2010.

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Policy Uncertainty can Cause More Crises

Taylor, John B. “Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis,” Federal Reserve Bank of St. Louis Review, May/June 2010, 92(3), pp. 165-76.

Approaches to systemic risk

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Systemic Risk• Policy Approaches

– Amputation• Volcker Rule

– Inoculation• Gresham’s Law

– Transplant• “Soft” Resolution

Kane, Edward. “Government Officials as a Source of Systemic Risk in International Financial Markets,” in Regulating

International Financial Markets: Issues and Policies, Edited by Franklin R. Edwards and Hugh T. Patrick, 257-65, Boston:

Kluwer Academic Publishers, 1992.

Have to Fail SIFIs, but How?

Herring, Richard, “Integrating Regulation, Supervision & Resolution of SystemicallyImportant Institutions,”University of Pennsylvania Working Paper 2010

“Soft”Resolution/ Downsizing

Conservatorship

Receivership

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Is this contagion?

Topics in financial market regulation

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Traditional View of Regulation

Transparent Translucent OpaqueGov’t Bond

MarketStock Market Futures and

Options MarketsUnit Trusts Mutual Funds Pension funds Finance

CompaniesInsurance

CompaniesCommercial

Banks

Financial Institutions•Asymmetric information between investors and firm high: Intermediary may have other sources of information, such as deposit or payment relationships•Acts as delegated monitor for unsophisticated investors•Monitoring information need only be communicated to institution: simple•Regulation to ensure safety and soundnessand protect unsophisticated investor

•Regulation such as deposit insurance may breed moral hazard•*Unseasoned Firms

Financial Markets•Asymmetric information between investors and firm low

•Sophisticated investors don't need third party monitor•Monitoring information must be communicated to each investor: complex•Regulation to ensure transparency

•Minimal regulation provides efficient, if harsh, incentives•*Seasoned Firms

Manage the Process:

Protect RegulatedIntermediaries

Foster Maturity

Plan for Next Generation

Mason, Joseph R. “Regulating for Financial System Development, Financial Institutions Stability, and Financial Innovation.”Financial Market Regulation in the Wake of Financial Crises: The Historical Experience, Alfredo Gigliobianco and Gianni Toniolo,

eds., Banca d’Italia, 17 April 2009.

Traditional View of Regulation

Big Cost of Getting it Wrong:• Asymmetric Information Crisis• Insolvency, not Illiquidity• Intermediation Economic Growth

Transparent Translucent OpaqueGov’t Bond

MarketStock Market Futures and

Options MarketsUnit Trusts Mutual Funds Pension funds Finance

CompaniesInsurance

CompaniesCommercial

Banks

Mason, Joseph R. “Regulating for Financial System Development, Financial Institutions Stability, and Financial Innovation.”Financial Market Regulation in the Wake of Financial Crises: TheHistorical Experience, Alfredo Gigliobianco and Gianni Toniolo,

eds., Banca d’Italia, 17 April 2009.

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Asymmetric information hides the risks that form the crisis “cliff”

Mason, Joseph R. “Cliff Risk and the Credit Crisis,” in The First Credit Market Turmoil of the 21st Century: Implications for Public Policy, Douglas Evanoff and George Kaufman, eds. World Scientific Studies in International Economics – Vol. 10. London: World

Scientific Publishers Co. Pte. Ltd., 2009, pp. 141-160. Presented at the October 2008 Federal Reserve Bank of Chicago and European Central Bank International Banking Conference.

Stimulating the real economy and fostering employment

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We have a long way to go to achieve normalcy

Fiscal stimulus may not be prudent for many countries

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Willem Buiter, “Global Economic View,” Citigroup Global Markets, 26 April 2010.

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Fiscal stimulus may not be prudent for many countries

Willem Buiter, “Global Economic View,” Citigroup Global Markets, 26 April 2010.

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Real Stimulus: New Frontiers• Turnpikes• Canals• Railroads• US Land• Telecommunications• Patent Law• Internet

• Elder Care?• Health?• Retirement?• Food?• Energy?• Technology?

Beggar thy Neighbor?

The next bubble?

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Summary and Conclusion

Five Key Items on Unfinished Agenda (Herring and Litan,1995)

• Emergency liquidity assistance for internationally active banks;

• Extensions of the Basel Accord;• Develop harmonized standards for securities

firms;• Regulate and supervise international financial

conglomerates;• Decide upon the proper role for market discipline.

All depend upon willingness to cooperate.

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Presentation by

Frances G. Burwell,

Vice president, Director to Transatlantic Relations and Studies at the Atlantic Council of the United States, Washington

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