A financial centre is a location that is home to a cluster of nationally or internationally significant financial services providers such as banks, investment managers or stock exchanges.:1 A prominent financial centre can be described as an international financial centre or a global financial centre and is often also a global city. An offshore financial centre is typically a smaller, low-tax jurisdiction that primarily serves non-residents.
Financial centres are locations with an agglomeration of participants in financial markets and venues for these activities to take place. Participants can include financial intermediaries (such as banks), institutional investors (such as investment managers), as well as central banks. Trading activity may take place on venues such as exchanges and involve clearing houses, although many transactions take place over-the-counter (OTC), that is directly between participants. Financial centres may host companies that offer advisory services, for example relating to mergers and acquisitions, or which participate in other areas of finance, such as private equity and reinsurance.
Financial centres serve the domestic business of their home country and may also serve international business. International activity occurs when one or more of the participants in the activity is foreign to the home country of the financial centre, or when the instruments themselves are international in nature such as Eurobonds. The term international financial centre or global financial centre is sometimes used to indicate a prominent financial centre where such international or cross-border business takes place.
International Financial Centers (IFCs)—such as London, New York, and Tokyo—are large international full-service centers with advanced settlement and payments systems, supporting large domestic economies, with deep and liquid markets where both the sources and uses of funds are diverse, and where legal and regulatory frameworks are adequate to safeguard the integrity of principal-agent relationships and supervisory functions.
The older financial centres, such and London, Amsterdam, Paris and New York, have long histories; today there are a diverse range of financial centres worldwide. While New York and London often stand out as the leading global financial centres, other established financial centres provide significant competition and several newer financial centres are developing. Despite this proliferation of financial centres, academics have discussed evidence showing increasing concentration of financial activity in national and international financial centres in the 21st century.:24–34 Others have discussed the ongoing dominance of New York and London and the role linkages between these two financial centres played in the financial crisis of 2007–08.
Prior to the 1960s, there was very little data available to rank financial centres.:1 In recent years many rankings have been developed and published. Two of the most relevant and widely referred to are the Global Financial Centres Index and the International Financial Centres Development Index.
Global Financial Centres Index
The Global Financial Centres Index is compiled semiannually by the London-based British think-tank Z/Yen and is sponsored by the Qatar Financial Centre Authority. London was the top-ranked centre from the inception of the index in March 2007 to September 2013, and New York has been ranked top since March 2014. As of March 2015, the top ten centres worldwide according to the Global Financial Centres Index are:
|1||New York City||785|
International Financial Centres Development Index
The International Financial Centres Development Index is compiled annually by the Xinhua News Agency of China with the Chicago Mercantile Exchange and Dow Jones & Company of the United States, and is known as the Xinhua-Dow Jones International Financial Centers Development Index. New York has been the top-ranked centre since inception of the index in 2010. According to the 2014 Xinhua-Dow Jones International Financial Centres Development Index, the top ten financial centres in the world are:
|1||New York City||87.72|
Comparisons of financial centres focus on their history, role and significance in serving national, regional and international financial activity. Each centre's offering includes differing legal, tax and regulatory environments. One journalist suggested three prime factors for success as a financial city: a pool of money to lend or invest; a decent legal framework; and high-quality human resources.
- New York City. During much of the second half of the 20th century, the United States and its financial capital, New York City, represented by Wall Street, were described as the leaders.:1:25:4–5 But over the past few decades, with the rise of a multipolar world with new regional powers and global capitalism, numerous financial centres have challenged the predominance of Wall Street, particularly from London and also Asia, which some analysts believe will be the focus of new worldwide growth.:39–49 One source described New York as extending its lead as the world's centre of finance in November 2014; according to Kinetic Partners, "New York has proven that it can draw and maintain institutions that believe it is the best place to grow their businesses".
- New York City remains the largest centre for trading in public equity and debt capital markets. The NYSE and NASDAQ are the two largest stock exchanges in the world. Debt markets in the US are deeper than in any other market. New York also leads in hedge fund management; private equity; and the monetary volume of mergers and acquisitions. The scale of the U.S. economy is reflected in the amount of assets managed and traded in New York City, the associated advisory activity, and the influence of the Federal Reserve.:31–32 Several investment banks and investment mangers headquartered in New York City are important participants in other financial centres.:34–35
- London. London has been a leading international financial centre since the 19th century,:74–75:149 a position it continues to maintain into the 21st century. However, like New York, it faces new competitors including fast-rising eastern financial centres such as Hong Kong and Shanghai. London is the largest centre for derivatives markets, foreign exchange markets, money markets, issuance of international debt securities, and international bank lending. As a result of its long history as a centre of lending and investment around the world, as well as the role it played in the development of new financial products such as the Eurobond market in the 1960s and derivatives in the 1990s, London is often described as an international financial centre.:2
- London benefits from its position between the Asia and U.S. time zones, and from its location within the European Union. The Bank of England and the European Banking Authority are based in the city. Both London and New York City may see their positions as financial centres further enhanced by the Transatlantic Trade and Investment Partnership currently under negotiation.
- Hong Kong. In 2010, the Hong Kong Stock Exchange raised nearly $53 billion in initial public offerings (IPO), compared with only $42 billion in the U.S. and $16 billion (£10 billion) in London. Hong Kong was the site of the world's largest IPO in 2006: that of the $19.1 billion Industrial and Commercial Bank of China. Hedge funds increased assets under management in Hong Kong from 2006 to 2010. One estimate in 2009 was that the Hong Kong stock market was the world's seventh largest and noted that 70% of the world's 100 largest banks were based in the city.
- As a financial centre, Hong Kong has strong links with London and New York City.:10–11 It developed its financial servcies industry while a British territory and its present legal system, defined in Hong Kong Basic Law, is based on English law. In 1997, Hong Kong became a Special Administrative Region of the People's Republic of China, retaining its laws and a high degree of autonomy for at least 50 years after the transfer.
- Tokyo. One report suggests that Japanese authorities are working on plans to transform Tokyo but have met with mixed success, noting that "initial drafts suggest that Japan's economic specialists are having trouble figuring out the secret of the Western financial centers' success." Efforts include more English-speaking restaurants and services and the building of many new office buildings in Tokyo, but more powerful stimuli such as lower taxes have been neglected and a relative aversion to finance remains prevalent in Japan. Tokyo emerged as a major financial centre in the 1980s as the Japanese economy became one of the largest in the world.:1 As a financial centre, Tokyo has good links with New York City, and London.
- Singapore. While not a major financial market itself, Singapore developed into the Asia region’s largest centre for foreign exchange and commodity trading, as well as a growing wealth management hub. Other than Tokyo, it is one of the main centres for fixed income trading in Asia. Being a Commonwealth country, it has good links with London, and also with New York City.
- Zurich. Zurich is a significant centre for banking, asset management including provision of alternative investment products, and insurance. Since Switzerland is not a member of the European Union, Zurich is not directly subject to EU regulation.
- Frankfurt. Frankfurt attracts many foreign banks which maintain offices in the city. It is the seat of Deutsche Börse, one of the leading stock exchanges and derivatives markets operators in the world, and the European Central Bank, which sets the monetary policy for the single European currency, the euro; in addition, in 2014 the European Central Bank took over responsibility for banking supervision for the 18 countries which form the Eurozone. It is also the seat of Deutsche Bundesbank, the German central bank (which was responsible for the monetary policy of the Deutsche Mark before the introduction of the euro).
- Frankfurt has been the financial centre of Germany since the second half of the 20th century as it was before the mid-19th century. Berlin held the positon during the intervening period, focusing on lending to European countries while London focused on lending to the Americas and Asia.
- Paris. Alongside equity trading on the Paris Stock Exchange, there is futures and options trading, insurance, corporate banking and asset management taking place in Paris. The city is home to the Banque de France and the European Securities and Markets Authority. Paris has been a major financial centre since 19th century.:1
- Luxembourg. The Luxembourg financial centre is the largest investment fund centre in Europe, and second in the world after the United States. It is the leading private banking centre in the Eurozone and the largest captive reinsurance centre in Europe. 143 banks from 28 different countries are established in Luxembourg. The country is also the third largest renminbi centre in the world by numbers, in certain activities such as deposits, loans, bond listing and investment funds. Three of the largest Chinese banks have their European hub in Luxembourg (ICBC, Bank of China, China Construction Bank).
- Seoul. South Korea's capital has been the world's fastest rising financial center since the late-2000s recession. In March 2009, Seoul ranked 53rd among global financial centers; by March 2012, Seoul had skyrocketed to number 9. Seoul has continued to build office space with the completion of the International Financial Center Seoul in 2013. It ranked 7th in the 2015 Global Financial Centres Index, recording the highest growth in rating among the top ten cities.
- Chicago. The Illinois city has the "world’s largest [exchange-traded] derivatives market" when the Chicago Mercantile Exchange and the Chicago Board of Trade merged in 2007, under the CME Group.
- Toronto. The city is a leading market for Canada's largest financial institutions and large insurance companies. It has also become one of the fastest growing financial centres following the late-2000s recession, helped by the stability of the Canadian banking system. Most of the financial industry is concentrated along Bay Street, where the Toronto Stock Exchange is also located.
- Shanghai. Official efforts have been directed to making Pudong a financial leader by 2010. Efforts during the 1990s were mixed, but in the early 21st century, Shanghai gained ground. Factors such as a "protective banking sector" and a "highly restricted capital market" have held the city back, according to one analysis in 2009 in China Daily. Shanghai has done well in terms of market capitalisation but it needs to "attract an army of money managers, lawyers, accountants, actuaries, brokers and other professionals, Chinese and foreign" to enable it to compete with New York and London. China is generating tremendous new capital, which makes it easier to stage initial public offerings of state-owned companies in places like Shanghai.
- Sydney. Australia's most populous city is a financial and business services hub not only for Australia but for the Asia-Pacific region. The Sydney State Savings Bank building is located on Martin Place in the central business district, home to the Sydney Stock Exchange and an array of business headquarters.
- Dubai. The second largest emirate in the United Arab Emirates is a growing centre for finance in the Middle East, including for Islamic finance. Its emergence as a financial centre is relatively recent, although commercial banking activity in the UAE became established in the second half of the 20th century (the first commercial bank in Dubai was British Bank of the Middle East in 1946, and the first domestic commercial bank was the National Bank of Dubai established in 1963).
- Amsterdam. Amsterdam is well known for the size of its pension fund market. It is also a centre for banking and trading activities. Amsterdam was one of the first financial centres to develop in Europe in the 17th century.:24
- Dublin. Dublin is a diverse financial services centre, home to banking, insurance and trading services as well as bespoke activities such as aircraft leasing. Dublin has a global reputation as an asset management centre, particularly for alternative investment funds.
- Milan. The city is Italy's main centre of banking and finance. It hosts the Borsa Italiana stock exchange, one of the larger stock exchanges in Europe, which is now part of the London Stock Exchange Group.:245
- Madrid. Madrid is the location of the largest of the four stock exchanges in Spain, the Bolsa de Madrid. As a financial centre, it has links with Latin America.
- Others. Mumbai is an emerging financial centre which currently provides services to support other financial centres. Cities such as São Paulo and Johannesburg and other "would-be hubs" lack liquidity and the "skills base," according to one source. Financial industries in countries and regions such as the Indian subcontinent and Malaysia require not only well-trained people but the "whole institutional infrastructure of laws, regulations, contracts, trust and disclosure" which takes time to happen.
|“||In today’s burgeoning and increasingly integrated global financial markets — a vast, neural spaghetti of wires, Web sites and trading platforms — the N.Y.S.E. is clearly no longer the epicenter. Nor is New York. The largest mutual-fund complexes are in Valley Forge, Pa., Los Angeles and Boston, while trading and money management are spreading globally. Since the end of the cold war, vast pools of capital have been forming overseas, in the Swiss bank accounts of Russian oligarchs, in the Shanghai vaults of Chinese manufacturing magnates and in the coffers of funds controlled by governments in Singapore, Russia, Dubai, Qatar and Saudi Arabia that may amount to some $2.5 trillion. -- Daniel Gross in 2007.||”|
An example is the alternative trading platform known as BATS, based in Kansas City, which came "out of nowhere to gain a 9 percent share in the market for trading United States stocks." The firm has computers in the U.S. state of New Jersey, two salespersons in New York City, but the remaining 33 employees work in a center in Kansas.
Offshore financial centres
An offshore financial centre, although not precisely defined, is usually a small, low-tax jurisdiction specialising in providing corporate and commercial services to non-residents in the form of offshore companies and the investment of offshore funds.
The term offshore financial centre is a relatively modern neologism, first coined in the 1980s. Although the terms are not synonymous, many leading offshore finance centres are regarded as "tax havens", and the lack of precise definition often leads to confusion between the concepts. In Tolley's International Initiatives Affecting Financial Havens the glossary of terms defines an "offshore financial centre" in forthright terms as "a politically correct term for what used to be called a tax haven." However, this is qualified by adding "The use of this term makes the important point that a jurisdiction may provide specific facilities for offshore financial centres without being in any general sense a tax haven."
In 2009 the International Financial Centres Forum (IFC Forum) was established by a group of professional service firms and businesses with offices in the leading offshore centres. According to its website, the IFC Forum aims to provide authoritative and balanced information about the role of the small international financial centres in the global economy.
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