The global financial crisis of the past two years has impacted all financial centres around the world. London, as the leading global financial centre, has been deeply affected by the crisis with some firms and markets undergoing major restructuring in the short to medium term as a result of the credit crunch. Several banks and other mortgage lenders, for example, have either been nationalised or been recapitalised with the estimated cost to the UK taxpayer expected to be around £60 billion.

UK bank lending has been constrained by the withdrawal of many foreign banks, along with the seizure in the credit market; while in European securitisation markets activity has been mainly limited to repurchase schemes operated by the central banks. Hedge fund assets managed in London have declined by over a third to $270 billion, due to poor performance and investor redemptions. Other sectors and markets are less affected by the crisis but have experienced a fall in business that might be expected during a downturn in the business cycle.

Despite these setbacks and the broad challenges facing the financial sector, London’s continuing prospects as the pre-eminent global financial centre are strengthened by a number of developments:

  • London once again came top of the rankings in the March 2009 edition of Global Financial Centres Index commissioned every six months by the City of London Corporation.

  • Beyond specific challenges in banking, securitisation and hedge funds, financial markets in London have continued to function efficiently and without interruption despite volatility and loss of confidence.

  • The structural strengths - diversity of markets, strong skills base, global orientation and legal system - that underpin London’s status as a global financial centre remain in place.

  • Global regulatory reform offers a framework for embedding the lessons of the crisis.

Key priorities for reform of financial regulation at national, EU and global levels include more convergence of the world’s regulatory and supervisory regimes; development of market structures that promote competition and openness to international participants; and regulation that blends necessary controls with scope for innovation.

London’s position as the key global financial centre of Europe is founded on the transaction of more international business than any other centre worldwide in, for example, cross border bank lending out of London and trading in foreign exchange and over-the-counter (OTC) derivatives. London’s role as a global financial centre is evidenced in its leading share of many such markets (see table).

Foreign firms make a crucial contribution to the trade surplus of UK financial services which reached a new high of £50 billion in 2008, up by over a quarter on 2007. In the latest global comparisons for 2007, the UK’s $67 billion surplus in financial services was three times that achieved by any other country. Overall, financial services represents a major component of the UK economy, accounting for over 7% of GDP and generating employment for over one million people.

The international insurance market began in London and much of the business there is administered through the Lloyd’s market, involving large brokers, such as Willis and Marsh. Investment banking services out of London are largely provided by US banks, such as Goldman Sachs, Morgan Stanley and JP Morgan; as well as those from Europe.

In exchange-traded derivatives, the value of trading on NYSE Liffe, based in London, is the biggest in Europe and second largest in the world. Some 46% of trades on Eurex, the second largest derivatives exchange in Europe, originated from the UK in 2008.

In newly developed markets, London is positioning itself as the leading global player in carbon markets, accounting for 39% of investments globally in offset schemes in 2007. The London-based European Climate Exchange accounted for 92% of futures and options trading in the EU’s Emissions Trading Scheme in 2008.


London is also establishing itself as the major Western gateway for Islamic finance. Over 20 banks supply Islamic financial services, including six that are fully Sharia compliant. Islamic services also encompass fund management, Sukuk issuance and trading, and education and training products offered by professional institutions such as the Securities and Investment Institute and the Chartered Institute of Management Accountants. London also offers the most comprehensive range of specialist maritime services in the world, covering shipbroking, legal services, finance, insurance, ship classification, dispute resolution and publishing.

London is both a global financial centre as well as being central to the UK financial services industry. Other cities, including Edinburgh, Glasgow, Manchester, Birmingham, Bristol and Leeds are important domestic financial centres.

UK SECTOR REPORT by Duncan McKenzie, IFSL

CONTACTS:

Bank of England
www.bankofengland.co.uk

Financial Services Authority
www.fsa.gov.uk

International Financial Services London
Tel: +44-(0)20-7213 9100
www.ifsl.org.uk

Lloyds of London
www.lloyds.com

London Stock Exchange
www.londonstockexchange.com

HM Treasury
www.hm-treasury.gov.uk

Birmingham Forward
www.birminghamforward.co.uk

Finance Industry Group
www.fignorfolk.com

Leeds Financial Services Initiative
www.leedsfinancialservices.org.uk

Pro Manchester
www.pro-manchester.co.uk

Scottish Financial Enterprise
www.sfe.org.uk

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