Little change in IFC world order. For now...

As the world’s leading financial centres continue to suffer from the consequences of the financial crisis, and the economies of many emerging markets show impressive growth, it is only natural to wonder if the appeal of New York and London is fading.

Professionals in the financial sector are certainly worried that heavier regulation coming out of the US and Europe will end up driving business away from their leading financial centres. The Dodd-Frank Act and Basel III have generated copious volumes of financial markets and banking rules, and have attracted much criticism from firms who fear their businesses, and the financial sector’s contribution to the economy, will suffer. Others, such as the International Monetary Fund, are calling for even tougher rules, particularly on banks, to strengthen balance sheets and contain systemic risk – all in the hope to avoid the damage that a weak financial sector can do to countries’ public finances if governments are called to bail them out.

Window of opportunity

While smaller jurisdictions are likely to come under pressure to implement these rules once they are finalised, there will be an interim period of a few years where certain centres could benefit from regulatory arbitrage. Whether they will be able to capitalise on this temporary advantage remains to be seen. Up to now, however, no significant change can be identified and The Banker’s ranking of international financial centres (IFCs) confirms this: New York and London still firmly sit at the top. However, the growth of certain emerging market hubs is palpable, both in the copious data behind our listing and in the views of professionals who share their opinions.

If the international banking world still has many good reasons to stay in its traditional, developed world locations despite heavier regulation, including the advantage of being based in an economy that is large enough to support it if things go wrong, the more nimble asset management community seems to be moving to other destinations, with Asia being the chief beneficiary. This is one of the results of The Banker’s first survey of global asset managers.

Rising stocks

Regionally, even if no change has happened at the top of our tables, the momentum gained by some financial centres suggests that competition is becoming more intense. Singapore is still the leading Asian hub and has the highest number of foreign listings as a percentage of the total number. Hong Kong, however, has been attracting the world’s highest value of initial public offerings (IPOs), raising a staggering $57.4bn in 2010. Driven mainly by Chinese companies, Hong Kong’s stock exchange has also attracted some international businesses, and the trend is set to continue.

In Latin America, Mexico City tops once again our regional ranking, but the rise of São Paulo’s financial markets suggests that it may soon be challenging for the number one position. Brazil has been deepening its capital markets and has attracted growing numbers of long-term investors. Its stock market was larger than Mexico City’s last year and while the Mexican capital still enjoys a high level of internationalisation on its stock exchange, numbers are not as high as they could be and companies seem reluctant to use the Mexican equity markets to raise capital.

In the Middle East, while Bahrain and its capital Manama suffered domestic political turmoil, Dubai in the United Arab Emirates and Qatar did not experience any unrest. Despite its own problems with the crash of the real estate market, Dubai remains the leading financial centre in the region but Doha, Qatar’s financial hub, is close behind and has been heavily investing in new financial services infrastructure. It also has the advantage of a fast-growing economy behind it.

With a growing ability to invest in their financial centres, and the possibility of benefiting from regulatory arbitrage while New York and London adopt heavier financial markets rules, emerging markets the world over are jostling for position. If it is hard to imagine a shift of significant business away from established hubs in the short term, it is very plausible to at least expect the reallocation of some financial activities to smaller jurisdictions in the next few years. It will be interesting to see what effects this will bring to the global map of IFCs.