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February 20, 2013 6:25 pm
If I were a mastermind seeking to undermine the City of London, I would shift Germany’s financial centre from Frankfurt to Berlin, just as the country moved its political capital from Bonn in the 1990s. Then it would be part of a cosmopolitan city where foreign bankers and lawyers might actually want to live.
It won’t happen but other European laws and regulations have put the 50-year expansion of the City as the world’s leading international financial centre in jeopardy. It faces a future where it may neither exist comfortably as Europe’s financial centre, nor as an offshore centre for global capital from the US, Asia and emerging markets.
The City has faced turning points before: in 1914, when the first world war ended the global expansion of the Victorian era; in 1963, when the US government’s tax on purchases of foreign securities revived it through the eurobond market; in 1986, when the Big Bang deregulation of the City made it the natural entrepôt for European and US banks.
Another potential turning point came in 1999, with the creation of the euro. As it turned out, the refusal of the UK to join did not matter – the City became the trading centre of the eurozone, as well as attracting a flow of listings and deals from Russia and elsewhere. By 2007, New York fretted at being overtaken by London as a global centre.
Perhaps it was simply delayed. A push by the European parliament to impose strict ratios on bankers’ bonuses is among the efforts since 2008 to hamstring hedge funds, financial trading and “Anglo-Saxon capitalism”. Together with the eurozone’s move toward a banking union, these pose an existential threat to the City.
A good thing too, some people (including many Britons) would say. The City’s freewheeling culture contributed to excessive risk-taking and, among other problems, the need to bail out banks such as Royal Bank of Scotland at a high cost to the British taxpayer. It lures so many oligarchs and wealthy bankers to London that others cannot afford to live alongside them.
But while the UK clearly needs to rebalance itself from over-dependence on banking – and linked professional services such as accountancy and the law – ripping down what it created over decades is a clumsy way to begin. London’s economic recovery has been three times stronger than the rest of the UK’s and financial services comprised 26 per cent of UK exports in 2011.
This is no excuse for blocking reform, but the UK has hardly been protectionist toward its biggest industry. Indeed, it has been in the vanguard of reform – it fought inside the EU for higher capital standards and the ringfencing of investment and retail banks, while France and Germany went soft on both.
The pair diluted capital requirements on their universal banks agreed under the Basel III framework. They also adopted light versions of proposals for structural reform by the Liikanen group, rather than the more rigorous UK regime. As Christian Noyer, governor of the Bank of France, said candidly, that would have been “against the national interest”.
They have been keener on regulations to curtail financial trading and hedge funds, from the Alternative Investment Fund Managers directive to last week’s EU deal to encourage taxes on financial transactions. Although rejected by the UK, it would make trading in London more expensive.
The European parliament has now intervened by trying to limit bank bonuses to one-times base salary (two with shareholder approval). “We need a quantum leap backwards for the big bucks,” says Philippe Lamberts, the Belgian Greens MEP who led the initiative. It is delaying legislation on the Basel III capital accord to get its way.
The most pointed challenge to the City comes from the European Central Bank, backed by France and Germany, which wants any clearing house responsible for euro securities to sit within the eurozone. In practice, that would pull trading in euro bonds and derivatives to Frankfurt, since few regard Paris as a serious contender.
That does not prove there is a conspiracy against the City. Some of these measures are self-interested, some of them matters of principle. Mr Lamberts may be indifferent, as he says, as to where trading takes place within the EU. Some even have their merits. If I were the ECB, now responsible for rescuing a eurozone clearing house in an emergency, I might want it within reach.
Indeed, much of this is the logic of the euro emerging a dozen years after its launch. The jolt of the 2008 crisis is impelling the eurozone towards banking union, while the country to which financial services are most vital will hover on the European periphery.
But it makes me worry about the City’s prospects. One does not need to be paranoid to imagine the City being slowly dismembered, with its euro listing and trading businesses switching to Frankfurt while its international and emerging markets operations move to New York or Hong Kong to evade EU-wide regulations.
If that starts to happen, the City’s strategic choices will be poor. Either the UK remains inside the EU and tries to fend off eurozone-driven rules as best it can, or the City supports a UK exit from the EU in the planned referendum. It would lose its European role and turn into a free-floating global hub.
Neither alternative is half as attractive as the space the City managed to occupy during the postwar era of global finance and deregulation. You can argue about whose fault that is, or whether it is just a case of European integration unfolding. But here the City stands uncomfortably, on the cusp of history again.
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