New York City is still the world’s leading financial centre, according to a McKinsey report published in January. Oh no it is not, it has just been overtaken by London, says a Z/Yen report published in March. Who should we believe? The McKinsey study was commissioned by New York City mayor Michael Bloomberg and Charles Schumer, a Democrat senator from the state of New York, so should its objectivity be suspect? But then, the Z/Yen survey was commissioned by the City of London, so perhaps the authors were telling their paymasters what they wanted to hear?
The truth is that both cities are at the top of their game. They are so closely matched that it is difficult to tell which is in the lead, and it is complicated by the fact that the two surveys use completely different methodologies.
The London one – the Global Financial Centres Index (GFCI), published for the first time this year – looks at the competitiveness of 46 financial centres around the world. London is first with 765 points, followed closely by New York on 760. Some way behind are Hong Kong, Singapore and Zurich (see table below). London and New York are “significantly ahead of the rest of the field to be the only true global financial centres”, write the authors.
Some of the other big centres are niche players, such as Zurich and Geneva for private banking and asset management, Hamilton (Bermuda) for reinsurance, and Dubai for Middle East finance and Islamic banking. Other centres are up and coming and are likely to reach the top 10 or 20 in the near future, such as Mumbai, Shanghai and Beijing.
Taxes and regulation
Michael Snyder, chairman of the policy and resources committee at the City of London, says: “London’s prime position is a reflection of the unrivalled talent pool clustered here.” He adds that “our firm but fair principles-based regulation supported by good market access… and an excellent business environment” are also key factors. But he is concerned that respondents to the GFCI noted that the UK’s corporate tax regime has become less competitive.
Daniel Doctoroff, deputy mayor of New York City, says that all surveys of senior executives in financial services around the world point to the “availability of talent” as the single most important factor in determining what influences their choice of location.
“Talent is our biggest competitive advantage,” says Mr Doctoroff. “For the past 200 years, New York has been a place where people have come to make their names, make their fortunes and make a difference in financial services, and we continue to be the leader today.
“It’s not a position that we take for granted. We have been very clear with our federal government that in order to sustain our financial leadership we have to ensure that the best and brightest minds continue to come to this city.”
Mr Doctoroff says the McKinsey report – Sustaining New York’s and the US’s Global Financial Services Leadership – identified three major problems that New York needs to deal with to stay on top. The first is US government visa restrictions, tightened up after 9/11. They need to be relaxed so the city can continue to attract talent, he says.
The second is the regulatory regime, which in the wake of the corporate scandals of the late 1990s and early this decade has become too strict. The pendulum has swung too far, especially with parts of the Sarbanes-Oxley Act. “Right now there is an effort in the Bush administration and the SEC [Securities and Exchange Commission], working with the Treasury and other regulators, to move that pendulum back,” says Mr Doctoroff. The third problem area is the fear of litigation, which is a particular concern for non-US companies.
He says that Mr Bloomberg and Mr Schumer recently met Federal Reserve chairman Ben Bernanke, Treasury secretary Henry Paulson and SEC chairman Christopher Cox to review progress on how these issues are being addressed. “We are encouraged that we are making meaningful progress,” says Mr Doctoroff. “Some changes will come this year, some in the next couple of years, and some structural reforms will take much longer.”
German designs
In the 1990s, thanks to the single European market and the advent of the euro, Frankfurt or Paris were tipped to knock London off its perch. They never did, but they are still centres to be reckoned with. Tanja Michelberger, financial markets project manager for Frankfurt Economic Development, believes that her city can justifiably claim to be number three in the world.
“We have a long history of being an open-minded, liberal and cosmopolitan trading city and financial market place,” she says. Specifically, she cites Frankfurt’s current reputation for liquid markets – especially in bonds, covered bonds (pfandbrief), funds and certificates – and the “outstanding global position” of Eurex, the world’s largest derivatives exchange and the leading clearing house in Europe.
Other success factors, she says, include German political backing for open markets and its high-class education and research facilities – Goethe University and Business School, Frankfurt School of Finance & Management, Centre for Financial Studies, e-Finance Lab, Institute for Law and Finance, Frankfurt MathFinance Institute, Institute for Monetary and Financial Stability and the Institute for Insurance Law.
As well as being an operational base for numerous commercially run financial institutions, Frankfurt is home to public sector institutions. It is the headquarters for the Bundesbank (the German central bank), European Central Bank, KfW Banking Group, the German division of the International Finance Corporation (part of the World Bank group) and CEIOPS (the Committee of European Insurance and Occupational Pensions Supervisors).
Frankfurt’s biggest weakness, says Ms Michelberger, has probably been its “lack of an integrated, confident and coordinated marketing” policy, partly due to Germany’s federal system which tends to downplay national strengths. Another weakness is Germany’s inflexible labour laws.
Capital moves
The International Capital Market Association (ICMA), which has more than 400 members in 48 countries, is based in Zurich and has offices in London, so no prizes for guessing which cities it favours. “If you suddenly have to hire a thousand traders, London is the only place in Europe you can do that,” says Kevin Milne, ICMA’s managing director. “Apart from its deep talent pool, there are other things that set London apart. More recently it has become a nicer place to live, and this has coincided with a long bull market.”
Zurich and Geneva are niche markets for bond trading and private banking. “With the advent of the Eurobond market in the 1960s, Switzerland got established because it had no exchange controls,” says Mr Milne. “Private banking has a long legacy in Switzerland. There is an impelling logic that if you are wealthy, want to minimise your tax and not display your wealth, you choose Switzerland for your banking.”
Mr Milne rates Bahrain and Dubai as excellent regional centres for the Middle East and Islamic banking and are growing so rapidly they could be in the top 20 in the next decade. Beijing and Shanghai are also ones to watch. “In the past six to 12 months, turnover on the Chinese exchanges has been going crazy, in a good way, and it’s showing no signs of abating,” he says.
James Nason of the Swiss Bankers Association says there are four cities in Switzerland that have a long history of conducting substantial banking business with non-resident private and institutional clients. “Zurich and Geneva are indeed the largest and best known, but one should not forget Basel and Lugano,” says Mr Nason.
“Of the approximately 330 banks in Switzerland today, 150 are foreign banks. They are licensed and regulated by the Swiss banking regulator just like Swiss banks and they have complete access to the market here.”
Hard to rise, easy to slide
It is hard to get to the top of any league table, yet all too easy to slip down. So what should cities in the ascendancy do to avoid being elbowed out of the way?
“At the national level, they need to make sure the taxation regime is reasonable so that companies and people are not punished,” suggests ICMA’s Mr Milne. “And they should not be too heavy, or too light, on regulation. Once you have become a major centre with a deep talent pool it is difficult to lose your place, unless taxation and regulation become a problem, as London and New York, respectively, are finding.”
Nor is success built on rational or tangible factors alone, says Frankfurt’s Tanja Michelberger. “A sound reputation, a long history of credibility and an open market mind-set are all important, so financial centres are vulnerable to the phenomena of mass herding and self-fulfilling prophecies if they fall victim to unfavourable or biased studies or opinions,” she says.
Fortunately, although capital is extremely mobile and can leave countries in milliseconds, people and institutions are less fickle and fleet of foot. So when a city is hit by negative publicity – as London and New York have, for perfectly justifiable reasons, on tax and regulation – there is time for the key actors to take effective counter measures.
THAT ‘X’ FACTOR
So what are the pre-requisites for success?
The Global Financial Centres Index (GFCI) uses four core indicators:
- Good availability of a flexible, educated and skilled financial services workforce.
- A conducive business environment (for example, a strong and open economy, competitive tax regime, effective but not stifling regulation, ease of doing business, and world-class support services such as legal and accounting services).
- A large, innovative and easy-to-access financial services market.
- First-rate infrastructure (office space, transport, telecoms, utilities, housing, living standards, social life).
To these a fifth indicator is added, that of ‘general competitiveness’, which is derived from how well a centre scores on the four basic factors, thus creating a critical mass which follows the principle that the whole can be bigger than the sum of the parts.
