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Lashing banks threatens UK finance hub
By Howard Davies |
00:00 UTC+8 October 23, 2010
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THERE is great angst in the financial world these days over several different rankings of world financial centers, largely based on surveys of firms.
How badly the financial crisis damaged the reputation and performance of the major Western centers is a question increasingly asked in London, and to a lesser extent in New York. So far, the message from the most recent tables is not too alarming for the incumbents. A ranking prepared for the City Corporation in London shows New York and London still neck and neck at the top of the league. The Banker magazine produces another, with New York on top and London a close second though the distance between them and their pursuers is narrowing. The scores in both London and New York for the quality and intensity of regulation, and the tax burden, have dropped. Firms seem nervous about the future in both areas.
The most striking change in the rankings is the rise of major Asian financial centers - and not just Hong Kong and Singapore, but also Shanghai, Beijing, and Shenzhen. The Chinese have been explicitly promoting their financial centers, and the impact is beginning to be seen. The World Economic Forum's Financial Development Index - yet another league table to consider - shows Hong Kong and Singapore very close indeed to London, with Chinese mainland now ahead of Italy on the overall measure of financial sophistication. Noodles are beating spaghetti.
Some of this is unsurprising. As the world's center of economic gravity shifts east, the balance of financial activity is bound to move with it. On the principle that if something is inevitable, it is wise to welcome it, the appropriate response in London and New York is to find ways of collaborating with these new centers.
But the more important question for the traditional financial centers is whether international activity that can move really is moving. That is far harder to judge. There are anecdotes about individual hedge-fund managers moving to Geneva. Every time a government, or a regulator, announces some new control, or a tightening of existing controls, there are threats from bankers that they will pack up and leave town, taking their Porsches and mistresses with them.
These threats, which used to have a lot of political impact, are now much less effective. Some politicians and commentators quickly say, "Good riddance." Even the Bank of England has asked whether, given the cost of mopping up the mess caused by the latest crisis, it is worth playing host to a global financial market.
This is risky speculation. However badly bankers have behaved and some clearly deserve a decade or more in the sin bin, financial services are a crucial element of London's economy. If the financial sector declines, what will replace it in employment terms?
Airy talk about science and manufacturing as ladders out of recession (a favorite image of former British Prime Minister Gordon Brown) is just that - empty words.
There are few, if any, examples of high-cost post-industrial societies reviving their manufacturing sector on a large scale once it has declined.
London, in particular, has no inalienable right to be a global financial center. The United Kingdom's domestic market is, after all, much smaller than that of the United States.
There must be a tipping point at which some combination of higher taxation, more burdensome regulation, and a hostile political climate causes financial firms to relocate.
There is a risk that Britain may now be approaching that point.
(Howard Davies is currently director of the London School of Economics. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
How badly the financial crisis damaged the reputation and performance of the major Western centers is a question increasingly asked in London, and to a lesser extent in New York. So far, the message from the most recent tables is not too alarming for the incumbents. A ranking prepared for the City Corporation in London shows New York and London still neck and neck at the top of the league. The Banker magazine produces another, with New York on top and London a close second though the distance between them and their pursuers is narrowing. The scores in both London and New York for the quality and intensity of regulation, and the tax burden, have dropped. Firms seem nervous about the future in both areas.
The most striking change in the rankings is the rise of major Asian financial centers - and not just Hong Kong and Singapore, but also Shanghai, Beijing, and Shenzhen. The Chinese have been explicitly promoting their financial centers, and the impact is beginning to be seen. The World Economic Forum's Financial Development Index - yet another league table to consider - shows Hong Kong and Singapore very close indeed to London, with Chinese mainland now ahead of Italy on the overall measure of financial sophistication. Noodles are beating spaghetti.
Some of this is unsurprising. As the world's center of economic gravity shifts east, the balance of financial activity is bound to move with it. On the principle that if something is inevitable, it is wise to welcome it, the appropriate response in London and New York is to find ways of collaborating with these new centers.
But the more important question for the traditional financial centers is whether international activity that can move really is moving. That is far harder to judge. There are anecdotes about individual hedge-fund managers moving to Geneva. Every time a government, or a regulator, announces some new control, or a tightening of existing controls, there are threats from bankers that they will pack up and leave town, taking their Porsches and mistresses with them.
These threats, which used to have a lot of political impact, are now much less effective. Some politicians and commentators quickly say, "Good riddance." Even the Bank of England has asked whether, given the cost of mopping up the mess caused by the latest crisis, it is worth playing host to a global financial market.
This is risky speculation. However badly bankers have behaved and some clearly deserve a decade or more in the sin bin, financial services are a crucial element of London's economy. If the financial sector declines, what will replace it in employment terms?
Airy talk about science and manufacturing as ladders out of recession (a favorite image of former British Prime Minister Gordon Brown) is just that - empty words.
There are few, if any, examples of high-cost post-industrial societies reviving their manufacturing sector on a large scale once it has declined.
London, in particular, has no inalienable right to be a global financial center. The United Kingdom's domestic market is, after all, much smaller than that of the United States.
There must be a tipping point at which some combination of higher taxation, more burdensome regulation, and a hostile political climate causes financial firms to relocate.
There is a risk that Britain may now be approaching that point.
(Howard Davies is currently director of the London School of Economics. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
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