Old Money: what makes a financial centre?
Financial centres come and go, but they're mostly very resilient. London's been near the top of its game since the Napoleonic Wars. Will it take Brexit in its stride?
by Professor Richard Roberts, King's College London
The UK's decision on June 23 to leave the European Union has prompted speculation about the possible relocation of financial services jobs from London to financial centres that remain in the EU.
Frankfurt and Paris are rolling out the red carpet, and Dublin and Luxembourg spreading their charms. Soundings among bankers by Boston Consulting Group ahead of the vote suggested a possible exodus of 80,000 jobs — a depletion of around 25% of London’s wholesale financial and professional services employment. Such a downturn would be twice as severe as the financial crisis.
Gérard Mestrallet, head of Europlace and cheerleader for Paris as an international financial centre, hailed Brexit as "le moment". But is it?
Top international financial centres, once established, have proven remarkably resilient in the past, protected by the operation of powerful economies of scale and incumbency advantages including operational financial markets and networks, as well as substantial sunk costs.
Antwerp was the pioneer; its long pre-eminence ended abruptly in 1585 through Spanish conquest.
It was succeeded by Amsterdam, until overrun by a French revolutionary army in 1795. And then it was London from the Napoleonic Wars to the Second World War. Post-war, New York was number one.
But London staged a remarkable comeback from the 1960s, based on its emergence as the world’s foremost centre for the burgeoning Euromarkets (enter Euromoney, GlobalCapital's sister publication, in 1969).
Ever since, New York and London have formed a double act; each pre-eminent in their respective continents and time zones, and as complementary as they are rivals.
They constitute a rank of their own in the twice-yearly Global Financial Centres Index (GFCI), jostling for the global top spot. London was top dog in the March 2016 GFCI with a score of 800 (on a scale of 1,000 points), while runner-up New York scored 792. Then, at a some distance, came the leading Asian centres: Singapore (755); Hong Kong (753); and Tokyo (728).
Among continental financial centres the first to feature was Zurich (714) in 6th place, then Luxembourg (698) in 14th, Geneva (694) in 15th; Frankfurt (689) in 18th, Paris (667) in 32nd, Amsterdam (664) in 34th and Dublin (643) in 39th. The impact of Brexit on the rankings in the next GFCI, due for publication in September, is awaited with interest.
There is a huge and long-standing discrepancy in the scale of wholesale financial and professional services activity in the two global centres relative to the leading European centres.
London hosts around 330,000 such jobs and New York 260,000.
Frankfurt and Paris both have some 70,000-80,000, Luxembourg perhaps 60,000, and Dublin 35,000. The size and depth of London’s financial services labour market is a key competitive advantage that looks out of reach for any of the challenger centres in the foreseeable future. But there may well be scope for attracting jobs from London in particular activities, such as asset management in Dublin and Luxembourg.
Over the centuries, the foremost reason for the shifts in the leadership of the international financial centres hierarchy has been war.
This even applies to London’s Euromarkets revival. US military expenditure overseas, notably Vietnam, was a driver of the growth of offshore dollars. Even an aggressively protectionist form of passporting rights denial and strict insistence on euro trades settlement and clearing in the EU are scarcely comparable dislocations.
Moreover, they may be minor disadvantages in relation to the efficiency benefits of operating in a larger financial centre.
Financial firms that operate in larger financial services clusters generally enjoy big competitive advantages. They benefit from the operation of external economies of scale, economies of scope and economies of agglomeration. For instance, through a greater range of clients and competitors, notably other wholesale financial firms, superior information flows and knowledge transfer, the depth of the skilled specialist labour market, and the wide availability of ancillary services. And the larger the cluster the more powerful these effects.
In theory, with modern technology many financial services professionals could operate from almost anywhere, but so far, there is little sign of declustering in front office activities.
One factor is the attraction for individuals of living and working in the global metropolises of London and New York. Paris can offer that too, but as a French investment banker put it: "At this stage, Paris is almost as appealing as Caracas or Havana for big banks and well-paid and wealthy professionals."
Frankfurt maybe? ‘"Frankfurt’s main handicap," said another, "is, quite simply, Frankfurt."