Die Bank, Zeitschrift für Bankpolitik und Bankpraxis, Number 4, April 2002

International financial centres: rivals or partner?

By Dr Dirk Franke

 

What future does Frankfurt have as a financial centre? Will its importance wane while the volume of funds moved globally continues to grow? These are questions that repeatedly spark heated debate in Germany. Pessimists see the city on the Main River playing second fiddle to a dominant London and New York. Yet, a number of things suggest that the competition between the financial centres is not a zero-sum game but a process from which at least London and Frankfurt may emerge stronger.

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New York and London remain the two most important financial centres in the world. In London, almost a third of global foreign exchange trading takes place, and the volume of stock exchange trading there is around three times higher than in Frankfurt. The deregulation of the British financial market, the so-called “Big Bang”, gave London a crucial boost at the end of the 1980s. Since then, the City has opened to international competition. The consequence: Foreign banks were able to compete with domestic banks, which resulted, for example, in all British investment banks being taken over by Japanese, Continental European or U.S. institutions.

Just how important London is for international investment banking is shown by the fact that Deutsche Bank has also moved responsibility for its investment business to London (and New York). As a result, recent speculation, prompting immediate denials, that Germany’s biggest bank might be moving its headquarters to London as well caused a particular amount of nervousness in Frankfurt.

But just how important is the question of how many and which companies set up their headquarters at a particular location for the standing of this financial centre? A study conducted by Loughborough University in England points out that not many British banks actually have their head office in London. It says that, while London may be the city of international financial business, it is by no means the city of bank headquarters. The study comes to the conclusion that the future of international financial centres depends more on which networks are in place at a given location.

Networks are what matter The quality of these networks reflects how quickly and reliably information flows, how good the relations between companies and cultural or social institutions are and, finally, how smoothly the business sector and government institutions work together. London and Frankfurt are successful in similar networks in some cases but also in very different networks in other cases. The bottom line is that these networks are shown to work best in London. Peter Taylor, one of the authors of the Loughborough University study, talks of the “Wimbledonisation” of London, meaning that “the financial industry’s most important tournament” is held there. New York ranks second, with Frankfurt, as best German city, coming seventh.

 

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