The City of London as a Global Financial Centre: An historical
and comparative perspective Professor Ranald Michie, Durham
University July 2012 Slide 2 The City of London Slide 3 Is the City
at a Tipping Point? The City of London is at bay: its reputation
brought low, its stars in the public dock, its conduct under
forensic scrutiny in Washington, Westminster and Brussels, and its
autonomy threatened by the prospect of a eurozone banking union.
The City of London is at bay: its reputation brought low, its stars
in the public dock, its conduct under forensic scrutiny in
Washington, Westminster and Brussels, and its autonomy threatened
by the prospect of a eurozone banking union. Financial Times 30 th
June 2012 Financial Times 30 th June 2012 The media view is that a
Tipping Point has been reached The media view is that a Tipping
Point has been reached Slide 4 Tipping Point The name given to that
one dramatic moment in an epidemic when everything can change all
at once is the Tipping Point. The name given to that one dramatic
moment in an epidemic when everything can change all at once is the
Tipping Point. Malcolm Gladwell, The Tipping Point: How little
things can make a big difference [London 2000] p 9 Malcolm
Gladwell, The Tipping Point: How little things can make a big
difference [London 2000] p 9 The term Tipping Point describes the
moment when the build up of internal forces makes change
inevitable: the dam bursts, the volcano explodes, the climate
changes or a financial crisis takes place. The term Tipping Point
describes the moment when the build up of internal forces makes
change inevitable: the dam bursts, the volcano explodes, the
climate changes or a financial crisis takes place. Has that point
been reached by the City of London? Has that point been reached by
the City of London? Slide 5 Tipping Points or Titanic Moments?
Numerous events are described as Tipping Points but how many are?
Numerous events are described as Tipping Points but how many are? A
Titanic Moment is an event that is both sudden and dramatic but
changes nothing. A Titanic Moment is an event that is both sudden
and dramatic but changes nothing. Only the passage of time confirms
whether a Tipping Point or a Titanic Moment has taken place. Only
the passage of time confirms whether a Tipping Point or a Titanic
Moment has taken place. Can past experience provide a guide to the
future? Can past experience provide a guide to the future? Slide 6
Was the Second World War a Tipping Point for the City of London?
Slide 7 Or, was the Second World War a Titanic Moment for the City?
Slide 8 The City of London has long been one of the worlds most
important Financial Centres 18 th Century: London, Amsterdam, Paris
18 th Century: London, Amsterdam, Paris 19 th Century: London,
Paris, Berlin, N.Y 19 th Century: London, Paris, Berlin, N.Y 20 th
Century: London, N.Y, Tokyo 20 th Century: London, N.Y, Tokyo Are
the challenges the City of London faces today any greater than
those of the past? Are the challenges the City of London faces
today any greater than those of the past? Slide 9 The Position of
Financial Centres in 2011 Ranking of Financial Centres 1. London 2.
New York 3. Hong Kong 4. Singapore 5. Shanghai 6. Tokyo Z/Yen, The
Global Financial Services Index, [Qatar Financial Centre Authority,
June 2011] The Global Financial Crisis of 2007/8 has not been
sufficient to remove the City of London from its position as the
leading international financial centre despite predictions at the
time The Global Financial Crisis of 2007/8 has not been sufficient
to remove the City of London from its position as the leading
international financial centre despite predictions at the time
Slide 10 The Position in 1911 The City of London was an even more
important financial centre a century ago The City of London was an
even more important financial centre a century ago London possessed
the worlds most important Stock Exchange London possessed the
worlds most important Stock Exchange London possessed the worlds
most important money market London possessed the worlds most
important money market Londons investment bankers were among the
most important in the world Londons investment bankers were among
the most important in the world Londons commercial banks were among
the most important in the world Londons commercial banks were among
the most important in the world London had no rival as a global
financial centre London had no rival as a global financial centre
Slide 11 London and the Global Capital Market Today1 Worlds Largest
Equity Markets, 2010 By market value of Domestic Companies Location
TotalShare of World 1. NYSE$13.4 trillion (22.5%) 2. Nasdaq $3.9
trillion (6.5%) 3. Tokyo $3.8 trillion (6.4%) 4. London $3.6
trillion (6.0%) 5. Euronext $2.9 trillion (4.9%) WFE: Statistics,
2010 Slide 12 London and the Global Capital Market Today 2 Worlds
Largest Equity Markets, 2010 By value of share trading
LocationTotalShare of World 1. NYSE$17.8 trillion(28.2%) 2.
Nasdaq$12.7 trillion(20.1%) 3. Shanghai$4.5 trillion(7.1%) 4.
Tokyo$3.8 trillion(6.0%) 5. Shenzen$3.6 trillion(5.7%) WFE:
Statistics, 2010 Slide 13 London and the Global Money Market Today
1 Interbank Financial Activity, 2010 By total borrowing and lending
between banks LocationTotalShare of World 1. London$ 6.9
trillion(17.9%) 2. New York$ 5.1 trillion(13.2%) 3. Tokyo$3.8
trillion(1.7%) BIS: Statistics, 2010 Much takes place locally Much
takes place locally Slide 14 London and the Global Money Market
Today 2 Foreign Exchange Turnover, 2010 Daily average of trading in
April LocationTotalShare of World 1. London$1.9 trillion(36.7%) 2.
New York$0.9 trillion(17.9%) 3. Tokyo$0.3 trillion(6.2%) BIS:
Statistics, 2010 Slide 15 London and the Global Money Market Today
3 Interest Rate Derivatives Turnover, 2010 Daily average of trading
in April Location Total Share of World 1. London$1.2
trillion(45.8%) 2. New York$0.6 trillion(23.8%) 3. Tokyo$0.1
trillion(3.3%) BIS: Statistics, 2010 Slide 16 London and New York
Compared Today 1 New York is the leading capital market in the
world New York is the leading capital market in the world The NYSE
and Nasdaq together dominate the global securities market The NYSE
and Nasdaq together dominate the global securities market
Investment banks located in Wall Street dominate corporate finance
and securities trading across the globe Investment banks located in
Wall Street dominate corporate finance and securities trading
across the globe New Yorks success has always relied upon the
business generated by US business New Yorks success has always
relied upon the business generated by US business Slide 17 London
and New York Compared Today 2 London is the leading money market in
the world London is the leading money market in the world The
London inter-bank market is the largest in the world The London
inter-bank market is the largest in the world The London foreign
exchange market is the largest in the world The London foreign
exchange market is the largest in the world Londons success as a
global financial centre now relies on the business done there by
banks from around the world. Londons success as a global financial
centre now relies on the business done there by banks from around
the world. Slide 18 Need for Financial Centres A consistent theme
throughout the history of international banking has been the
importance of international financial centres. A consistent theme
throughout the history of international banking has been the
importance of international financial centres. Committee on the
Global Financial System, Long Term Issues in International Banking
[BIS July 2010] p 12 Committee on the Global Financial System, Long
Term Issues in International Banking [BIS July 2010] p 12 A
Financial Centre provides an interface between banks allowing them
to make and receive payments, borrow from each other when short of
funds, lend to each other when in surplus, and balance assets and
liabilities across time, space, currency and risk. A Financial
Centre provides an interface between banks allowing them to make
and receive payments, borrow from each other when short of funds,
lend to each other when in surplus, and balance assets and
liabilities across time, space, currency and risk. Slide 19 Role of
London London has long provided the Financial Centre that meets the
needs of bankers. London has long provided the Financial Centre
that meets the needs of bankers. Since the 19 th century,
internationally active banks have sought a London branch. Since the
19 th century, internationally active banks have sought a London
branch. Committee on the Global Financial System, Long Term Issues
in International Banking [BIS July 2010] p 12 Committee on the
Global Financial System, Long Term Issues in International Banking
[BIS July 2010] p 12 A Survey conducted in 2007 concluded that
London ranked first as an international banking centre by whatever
measure was used: number of bank offices, inter-bank market
activity, extent and degree of connectivity. A Survey conducted in
2007 concluded that London ranked first as an international banking
centre by whatever measure was used: number of bank offices,
inter-bank market activity, extent and degree of connectivity. G.
Von Peter, International Banking Centres: a network perspective.
BIS Quarterly Review 2007 G. Von Peter, International Banking
Centres: a network perspective. BIS Quarterly Review 2007 Slide 20
Continuity of London ...remarkable consistency in the attractions
of the City of London for international banking despite repeated
global financial crisis and ongoing financial innovation.
...remarkable consistency in the attractions of the City of London
for international banking despite repeated global financial crisis
and ongoing financial innovation. C. R. Shenk, The Decline of
Sterling: Managing the retreat of an international currency, 1945
1992 [Cambridge 2010] p 240 C. R. Shenk, The Decline of Sterling:
Managing the retreat of an international currency, 1945 1992
[Cambridge 2010] p 240 Reports published since the Global Financial
Crisis of 2007/8 indicates Londons continuing importance as a
centre for international banking Reports published since the Global
Financial Crisis of 2007/8 indicates Londons continuing importance
as a centre for international banking IFSL Research, International
Financial Markets in the UK [London 2009] IFSL Research,
International Financial Markets in the UK [London 2009] H.M.
Treasury, UK International Financial Services: The Future [London
2009] H.M. Treasury, UK International Financial Services: The
Future [London 2009] Slide 21 WHY? The concentration of
international financial services in a small number of centres
results from strong economic pressures affecting centres and the
firms operating within them. The sharing of common services, access
to pools of skills, speed of dissemination of information and risk
are all forces which lead to the clustering of practitioners. Thus
externalities are created, such that each firm derives extra
benefit from the proximity of other firms. The concentration of
international financial services in a small number of centres
results from strong economic pressures affecting centres and the
firms operating within them. The sharing of common services, access
to pools of skills, speed of dissemination of information and risk
are all forces which lead to the clustering of practitioners. Thus
externalities are created, such that each firm derives extra
benefit from the proximity of other firms. The Competitive Position
of Londons Financial Services: Final Report 1995 Slide 22 The
financial services sector still exhibits a natural clustering
effect despite advancement in remote work. Once a certain critical
concentration of financial services businesses exists in a given
area, the value to other financial services businesses of
co-location begins to outweigh some of the potential drawbacks
associated with that location, such as high occupancy costs. A high
concentration of financial services businesses tends to be
correlated with a similarly high concentration of clients and
providers of support services, which creates the potential for
additional business opportunities and more efficient operation this
clustering of business has the additional benefit of creating a
large pool of highly-qualified workers, which is a key
differentiation in financial services. Sustaining New Yorks and the
US Global Financial Services Leadership 2006 Slide 23 What Created
the Cluster? Britain was the first modern economy Britain was the
first modern economy Economic Growth created a need for banks: To
collect savings/make loans Economic Growth created a need for
banks: To collect savings/make loans Banks needed to do business
with each other on behalf of customers and themselves Banks needed
to do business with each other on behalf of customers and
themselves London was the largest centre of wealth, population,
trade and communications London was the largest centre of wealth,
population, trade and communications A financial cluster developed
in London A financial cluster developed in London Slide 24 Rise of
the Financial Cluster Slide 25 City of London today Today the City
of London is a specialised financial centre focussed on domestic
and international finance and related activities Today the City of
London is a specialised financial centre focussed on domestic and
international finance and related activities Employment in the City
of London and Canary Wharf in 2009: Total: 415,000 Employment in
the City of London and Canary Wharf in 2009: Total: 415,000
Finance, Insurance/Law/Accountancy: 232,682 (56%) Finance,
Insurance/Law/Accountancy: 232,682 (56%) Other occupations: 182,822
(44%) Other occupations: 182,822 (44%) Slide 26 The Connected
Cluster Paris-London telegraph, 1851 Paris-London telegraph, 1851
London-New York telegraph, 1866 London-New York telegraph, 1866
International Telephony, 1890s International Telephony, 1890s Fibre
Optic Cables, 1960s Fibre Optic Cables, 1960s Computer Networks,
1970s Computer Networks, 1970s Algorithmic trading, 1990s
Algorithmic trading, 1990s London at the centre of international
communications London at the centre of international communications
Slide 27 The Early Development of the London Money Market Slide 28
The London Money Market before the First World War To the discount
house Smith St. Aubyn, the whole business was a matter of routine
as in this comment in January 1914 To the discount house Smith St.
Aubyn, the whole business was a matter of routine as in this
comment in January 1914 we had a big book but found no difficulty
in getting the money required at c.2-2% for a week. Bills as scarce
as ever and rates still falling. It is extraordinary how long the
drop has now lasted. 1 and 2 months can be sold at 2% we had a big
book but found no difficulty in getting the money required at
c.2-2% for a week. Bills as scarce as ever and rates still falling.
It is extraordinary how long the drop has now lasted. 1 and 2
months can be sold at 2% Slide 29 Banking Networks 1 Slide 30
Banking Networks 2 Slide 31 Correspondent banking networks Banks
with London offices accepted banks from around the world as
customers Banks with London offices accepted banks from around the
world as customers Banks in London accepted deposits from other
banks Banks in London accepted deposits from other banks Banks in
London lent money to other banks Banks in London lent money to
other banks Banks in London borrowed from other banks Banks in
London borrowed from other banks London was at the centre of the
international payments system London was at the centre of the
international payments system Banks in London were at the centre of
international banking Banks in London were at the centre of
international banking Slide 32 Banking Networks 3 Slide 33 Banking
Networks 4 Slide 34 Shocks: The First World War Smith St. Aubyn
Smith St. Aubyn 1 August 1914 1 August 1914 The Joint Stock banks
panicked, and it was only at quarter to one that we were able to
get anything. A truly fearful Saturday The worst day we have ever
had since the business began The whole market absolutely broke. The
Joint Stock banks panicked, and it was only at quarter to one that
we were able to get anything. A truly fearful Saturday The worst
day we have ever had since the business began The whole market
absolutely broke. 7 August 1914 7 August 1914 A moratorium declared
for one month, which saved the whole financial situation. We
re-opened for business but did nothing. A moratorium declared for
one month, which saved the whole financial situation. We re-opened
for business but did nothing. Slide 35 Shocks: The Second World
War: Before Normally, the dealing room at the Overseas Branch of
the Bank was one of the liveliest in the building, filled
throughout the day with the clamour of telephone conversations and
the bargaining of expert dealers making and accepting contracts in
half-a-dozen languages with their fellows in financial centres
throughout the world. Very large sums were dealt in hourly by
verbal contract, a swift, trained judgement being essential to
ensure a satisfactory currency position when the days work was
done. J. Wadsworth, Counter Defensive 1946 (Midland Bank) Slide 36
Shocks: The Second World War: After With the first shot of war this
room was silenced, the special equipment left in a dusty stillness
that has lasted the past six years. So, also, throughout the whole
field of foreign business normal transactions were suspended, but
though the flow of ordinary everyday work had been arrested, some
form of foreign trading was essential. International transactions
are vital to Britains survival, and in war conditions the handling
of the necessary financial arrangements, under Government direction
and control, made up in complexity a large part of the decline in
volume. J. Wadsworth, Counter Defensive 1946 Slide 37 Resilience:
Networks and Markets Survived The networks remained The networks
remained The market remained The market remained Greater Government
Control Greater Government Control Competition from New York
Competition from New York Slide 38 Euromarkets Eurodollars in the
1960s Eurodollars in the 1960s Escaping Regulation in the USA
Escaping Regulation in the USA Creating a market in London for US$
deposits held in banks outside the USA Creating a market in London
for US$ deposits held in banks outside the USA London switched from
to $ in the 1960s London switched from to $ in the 1960s Foreign
banks opened branches in London to deal directly with each other
Foreign banks opened branches in London to deal directly with each
other London was well positioned to provide the inter-bank markets
required after the collapse of central bank control in the 1970s
London was well positioned to provide the inter-bank markets
required after the collapse of central bank control in the 1970s
Slide 39 End of the 1960s Slide 40 End of 1990s Slide 41 The Basis
of Londons Success as a Global Financial Centre: Markets London
developed a sophisticated money market in the early nineteenth
century London developed a sophisticated money market in the early
nineteenth century This money market attracted ever more banks from
home and abroad This money market attracted ever more banks from
home and abroad The London money market became deeper and broader
The London money market became deeper and broader The London Money
Market survived wars, crisis, government intervention and economic
decline. The London Money Market survived wars, crisis, government
intervention and economic decline. Slide 42 The Basis of Londons
Success as a Global Financial Centre: Networks Correspondent
networks allowed banks to lend money in London Correspondent
networks allowed banks to lend money in London Correspondent
networks allowed banks to borrow money in London Correspondent
networks allowed banks to borrow money in London Correspondent
networks survived the consequences of conflict and the end of
Empire Correspondent networks survived the consequences of conflict
and the end of Empire From correspondent networks emerged banks
with branches located in the major financial centres of the world
From correspondent networks emerged banks with branches located in
the major financial centres of the world Slide 43 Fundamentals of
Financial Centres Centripetal Forces: Driving business to the
largest financial centre Centripetal Forces: Driving business to
the largest financial centre Deep/broad markets, expertise,
facilities Deep/broad markets, expertise, facilities Centrifugal
Forces: Driving business out of the largest financial centre
Centrifugal Forces: Driving business out of the largest financial
centre Cost of office space, cost of labour, burden of tax and
regulation Cost of office space, cost of labour, burden of tax and
regulation Constant flux between centripetal and centrifugal forces
Constant flux between centripetal and centrifugal forces Slide 44
Conclusion 1 There are fundamental reasons why London is such an
important international financial centre. There are fundamental
reasons why London is such an important international financial
centre. These reasons have changed over time. These reasons have
changed over time. Today those reasons are strongest for deposit
banking and money market activity Today those reasons are strongest
for deposit banking and money market activity These reasons are
weakest for investment banking and capital market activity These
reasons are weakest for investment banking and capital market
activity Slide 45 Conclusion 2 The current problems of the City of
London are Titanic Moments not Tipping Points despite the views of
the media, politicians and the public The current problems of the
City of London are Titanic Moments not Tipping Points despite the
views of the media, politicians and the public Titanic Moments
become Tipping Points if they provoke a sufficiently strong
reaction Titanic Moments become Tipping Points if they provoke a
sufficiently strong reaction Government regulation of the City
could convert a Titanic Moment into a Tipping Point unless those in
the City respond Government regulation of the City could convert a
Titanic Moment into a Tipping Point unless those in the City
respond Slide 46 Conclusion 3 Banks need to develop mechanisms and
procedures that control the actions of those who work for them. If
they do not the self interest of the few will destroy the
livelihood of the many Banks need to develop mechanisms and
procedures that control the actions of those who work for them. If
they do not the self interest of the few will destroy the
livelihood of the many Markets need to introduce rules and
regulations that police the behaviour of participants so as to
prevent price manipulation and guarantee payment and delivery
Markets need to introduce rules and regulations that police the
behaviour of participants so as to prevent price manipulation and
guarantee payment and delivery