Everyone warned that it would be the beginning of the end. That the status quo
was set to change and that Brexit would bring about the collapse of
London's powerful financial industry sooner or later.
It was said that Frankfurt, Paris or even Amsterdam would succeed in unseating the power
of the City. Along with New York, one of the two most important financial centers on the planet.
To give you an idea, approximately 2.5 times more dollars are traded
in the United Kingdom than in the United States. Now, Brexit is already a reality, and that has
made us here on VisualPolitik, along with our friends at Value School ask a few questions:
What influence does the City of London really have in global finance? Is the City as under
threat as its critics claim? Why is London, along with New York, said to be the great
financial capital of the world? Well... Let's get started.
Strictly speaking, the City of London, also known as the City or the Square Mile, is one
of the 33 boroughs that make up Greater London. A district with some special characteristics.
For example, the City has its own government and much more autonomy than the other boroughs
that make up Greater London. In fact, the City's municipal corporation has
2,000 years of self-government behind it. It is the oldest democratic formation on the planet.
Of course, we are talking about a somewhat unusual democracy, because in the City,
it’s not only the physical residents that vote, but also the companies through their employees.
In fact, due to this arrangement, the companies have more votes than the residents themselves.
In any case, if the City is known for one thing, it is for specializing in the financial industry
and giving its name to one of the two most important financial centers in the world.
Between the City and the Canary Wharf area, they have managed to get nearly 800,000
people working in highly-skilled jobs linked to the financial industry.
And that expands to 2.3 million nationwide. It is what many call
the last vestige of the British Empire. So, how important is London really in
the international financial scene? What role does it play exactly?
Well... to answer these questions,
I think the best thing to do is to put some facts on the table:
Thanks to the City, financial services bring the UK a trade surplus of more than $80 billion
each year. More than 100 billion if we take into account related professional services,
such as law firms or consultancy firms.
Neither Singapore, Switzerland nor even the very United States of America come close to
this figure. Take a look.If you are a government or large company and want to secure a large loan,
you may have to go through London. Nearly one-fifth of all international bank
lending and over 12% of all listed international bonds originate from the United Kingdom.
And even more striking, more than 40% of the world's currency trading
also passes through here. More than 2.4 trillion dollars are traded every day.
Put another way, 2.5 times more dollars are traded in the United Kingdom than in the United States,
while the United States is also the largest Yuan trading center outside China.
And that's not all. With more than 200 established banks,
London's financial industry is one of the world's largest in private banking, fund management,
insurance and financial derivatives. Derivatives that, for example,
have also made London one of the main trading centers for commodities and energy.
Then, in terms of the number of Hedge Funds, London is the second capital
of the world behind New York. And if we’re talking about Venture Capital, the British
capital is only surpassed internationally by San Francisco, the Big Apple and Boston.
All this, VisualPolitik fans, is precisely what explains why this industry generates
a net income of more than 100 billion dollars each year for the United Kingdom.
But.... at this point many of you may be wondering, but why the City? Why has London
become such an important financial center? Well, the truth is that the story
goes back a long way. During the times of the British Empire,
London became something like the nerve centre of the global economy. A status that favored the
development of a huge financial industry. For example, it was in this city that the
world's first investment funds emerged in the second half of the 19th century.
However, despite the empire falling,
the City kept its prominence. To explain this we can find three major turning points.
The first of these took place in the late 1950s. At that time, European banks were
beginning to be overflowing with dollars. The North American giant was gobbling
up a good chunk of the world's production and in exchange was handing over Uncle Sam's banknotes.
Well, all this abundant availability of funds and the fact that British regulators decided
not to interfere in dollar-denominated transactions between foreign players led
to the birth of the Eurodollar market in London. A huge market for financing and the exchange of
dollars that takes place outside the United States and therefore is not subject to the
supervision of the Federal Reserve or its cash requirements, nor to any guarantee on deposits,
or anything of the sort. We are, therefore, talking about a much freer and cheaper market.
In this way, the Eurobond market grew to become one of the pillars of the global financial system.
And yes, London became the main Eurobond center in the world. If you want financing in dollars,
it may even be easier to get them in the British market than in the United States.
The second turning point had to do with decolonization. The fall of the British Empire
left many small territories scattered around the world. Territories that, in some cases,
despite their newfound autonomy, retained their political and economic ties with the
metropolis. We are talking about places like the Cayman Islands, Bermuda and the Virgin Islands.
Places that, in order to make money, had opted to become important offshore
financial centers. We are talking about places that guarantee low taxes,
high legal security and conditions of anonymity. Well, thanks precisely to their ties with the
metropolis, much of their activity is channeled and managed precisely through London.
And finally, the third turning point came during the Thatcher era,
when exchange controls and a large part of the financial regulations that existed at the time
were abolished. This policy was a real boost for a City that has continued to grow ever since.
However, Brexit unleashed the storm. When on 23 June 2016,
British citizens voted to leave the European Union, the foundations of the City shook.
After the vote, dire predictions began to emerge about the future of this finance industry.
The end of London as a leading international financial center seemed almost a fait accompli.
Of course, prophecies do not always come true.
Listen up. (THE PROPHECY OF DESTRUCTION)
London's role as the financial capital of Europe seemed about to come to an end. It
seemed that banks and financial institutions would run for cover and move much of their
business to the European Union. Even Madrid set up its own platform
to try to get its share of the spoils. And indeed, the first direct consequence
of Brexit was that Amsterdam overtook London as the main trading center in Europe. Of course,
the big headlines were not long in coming: (Amsterdam overtakes London as Europe's
leading stock market. The City or financial district of London has lost "its historical
position as the main enclave for the European market". El Confidencial)
Overnight, on 1 January 2021, €6 billion, that’s $6.8 billion US dollars of daily trading
moved from London to the City of Amsterdam to comply with Brussels regulations.
Euronext, the largest stock exchange operator in the European Union, began moving its
data centers from Essex to Bergamo, Italy. It looked like the first signs of a sinking ship.
In fact, according to estimates by Jupiter, a leading asset manager,
the political risk arising from Brexit could have penalized London-listed companies at a 40%
discount to their international peers. 40%. However, let’s take a moment before passing
judgment because, in spite of everything, things look much less dramatic today.
The European Union's efforts to reduce its dependence on the United Kingdom
do not seem to be paying off at the moment. London remains the main place to raise capital from the
old continent as well as the dominant center for foreign exchange, insurance and debt trading.
And it doesn't look like any of that is going to change, at least not in the short term.
In fact, the London financial industry had its best year since 2007 in 2021.
Revenues grew strongly, salaries in the sector increased by almost 20%
and new estimates point to only 7,400 jobs moving to the continent. This represents
less than 1% of the jobs generated by the financial industry in the British capital.
In addition, we have to bear in mind that whatever may happen with EU regulation, 70% of the City's
business does not depend on the European Union. And so VisualPolitik watchers, today, the massive
financial services cluster developed in London seems to have no competition except in New York.
And there’s even more. No longer bound by European regulation, the British authorities
seem to be working on a new plan to improve their competitive position. One example is the so-called
"dark pools", private systems that allow large blocks of shares to be bought and sold
outside the public stock exchanges. It’s a strategy that the EU has tried
to clamp down on, but which London seems to be making much more flexible.
Of course, the City faces significant challenges, especially when it comes to the stock markets.
For example, since 2010, the number of international companies listed in
London has fallen from 599 to 370. As a result, the number of companies listed
in London has fallen from more than 10% of the world's market capitalization to just over 3%.
However, if one thing seems clear, it is that the prophecies failed.
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