You should never believe too much of what you read in the newspapers: you may have read that Brexit is going to demolish the City of London’s standing as a global financial centre and the dominant financial centre in Europe. Or that the City is level-pegging with New York as a financial centre and is effectively ‘Brexit-proof’. At capital markets think tank New Financial we have been tracking the fortunes of global financial centres over the past few years, and our latest report makes it clear that neither argument is true.
So what’s the summary?
The UK is by far the largest financial centre in Europe and has a much bigger lead over its European rivals in international banking and finance than other rankings suggest. Overall, across more than 40 measures of activity, the UK is three times bigger than France or Germany as a financial centre – and five times bigger when it comes to international business. But…financial centres in Asia are catching up fast, and the UK’s lead in some sectors will already have been dented by Brexit.
What about the global context?
On a global level, the US is the clear winner in a one-horse race. The US is the world’s top financial centre by a wide margin: its overall score of 84 out of 100 is more than double that of the UK (35), and it is by the far the largest finance centre in absolute terms for both domestic activity (17 out of 21 sectors) and international activity (11 out of 21).
I thought London and New York were ‘neck and neck’?
No, not in terms of scale. Other rankings of financial centres mainly use qualitative metrics to measure the attractiveness and competitiveness of different cities (is it a nice place to live? Is the local workforce well-educated? etc). We think the best measure of the attractiveness of a financial centre is where firms choose to locate their business. Our index uses hard measures of value (how much trading is conducted in the UK? What is the value of IPOs in France?) to provide a more accurate measure of the relative scale of different markets.
So there’s good news and bad news?
Yes – the ‘bad’ news is that the UK is a long way behind the US as a domestic and international financial centre, though it comes a strong second place overall. The good news is that the UK is much further ahead of its European rivals than you might have thought. As an example: across seven different measures of trading activity in equities, FX and derivatives, 15 times more business is conducted in the UK than in its nearest European rival Germany.
How international is the City?
The big difference between the UK and the US – and between the UK and most European financial centres – is that the UK is a much more international financial centre. As a domestic financial centre (the UK stock market, UK pensions etc), it’s quite small – about the same size as France. But a huge part of the City’s success is that it acts as a crossroads for international business. In the sectors where we could measure it, nearly half of all banking and finance activity that takes place in the UK is international (similar to Hong Kong and just behind Singapore and Luxembourg). In contrast, only 14% of activity in the US is international, 9% in France and just 3% in China.
What about competition from Asia?
It’s a mixed picture. China is a huge domestic market for banking and finance (the second largest in the world after the US) but a tiny international market. It’s a similar story in Japan. The real competition is from Hong Kong and Singapore, which have tiny domestic markets but big and fast-growing international sectors: over the past few years international activity in Hong Kong and Singapore has grown by around 50%, a much faster rate than the UK or global average.
What about Brexit?
It’s too early too early to measure the full impact of Brexit on the City and the UK as a financial centre (but this index will be able to measure that impact in a few years). Supporters of Brexit will point to the huge lead in international business as evidence that no financial centre in the EU is going to overtake London anytime soon (though no-one, least of all Paris or Frankfurt, ever said they would).
Critics will point to the fact that the UK’s lead in some sectors has already been dented: a big chunk of foreign equity trading has already gone to Amsterdam, and some £700bn in foreign bank assets is on the move, mainly to Frankfurt. Other sectors such as derivatives trading, clearing and potentially asset management could all be at risk.
Everyone should be concerned at the relative stagnation of domestic activity in the UK since the referendum: across 21 sectors it grew by an average of precisely 0% compared to a global average of 16%, perhaps down to the uncertainty created by the referendum.
So what about ‘Global Britain’?
There is no question that London and the UK will remain the dominant and most international financial centre in Europe for the foreseeable future. The real challenge is going to be building alliances with other markets to minimise the impact of Brexit – and fighting off future competition from Asia.
William Wright is managing director of capital markets think tank New Financial