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What makes a financial center? In one word: Flexibility
I have been mulling a question, prompted by a silly article in the Financial Times. The piece contended that Barclays’ exit from much of investment banking was the end of prominence for London as a financial center. Ridiculous.
This got me wondering: What does make a financial center. Why has my town, New York, been a financial center since the 18th century? Why has London been a financial center since long before that? Why were Amsterdam and Venice financial centers for a few centuries but are no more? Will Frankfurt, now the home of the ECB and Europe’s bank regulator, become a real financial center?
There are so many tempting issues to explore. Please do not be too critical if I leave out your pet theory.
In my opinion, people are what make a financial center. In the U.S., people who want to climb the letter of success head for NYC. People from all over the world who want to get ahead head for NYC. They have done so for a couple of centuries. Therefore NYC has a deeper talent pool that is more motivated than anywhere else. That deeper and more motivated talent pool also creates a place that such people like to live. It has restaurants, theaters, museums, a yoga studio or gym on every corner (it seems)—and high prices that only the successful can afford. If NYC ceases to be a magnet for people that want to get ahead, it will cease to be the world’s financial center. Taxes can be high—but there would be a limit. (Washington also has become a magnet, but for a different type of people.)
London has similar advantages. Like NYC, it is exciting, international, intellectually stimulating. That is the source of London’s allure. If London makes living there unattractive, such as by taxing high earners too much, it will wither.
Regulation also may play a role. But except at the extremes, clever people adapt to financial regulation. An August 19 comment in the FT by
John Authers, a top Financial Times writer, recently cited studies showing that from 2008 to 2013, NYC increased its investment management market share from 12.6% of global assets to 20%. The studies attribute the growth to higher regulatory costs. You read that correctly. Those costs have meant that size has become more important to profitability. The cost of compliance has increased; therefore once the mechanisms are in place, they can cover whatever amount of assets. Maybe so, but to explain New York’s ability to benefit from that, I think we need to look again at talent and incentives.
Will Frankfurt become the equal of London or New York? I think not. Flexibility is the key characteristic of successful people in New York and London. That is not yet true in Frankfurt and seems unlikely to be true in the near future. Just contrast the head of the Bundesbank with the Governor of the Bank of England or the Chair of the Fed or compare the German finance minister with a U.S. or British equivalent. I do not see the world’s go-getters going to Frankfurt to get.
So what happened to Venice and Amsterdam? Venice and Amsterdam were financial centers because that is where the ships literally came in. Their financial basis was the world trade that their harbors made possible. When communications no longer required that finance and trade be in the same place, their financial prominence withered. Both still are wonderful cities, but they do not attract the world’s go-getters.
Venice, Amsterdam, London and New York all have attracted, in their financial heydays, artists from all over the world. Maybe the arttists follow the money, like everyone else.
Probably I am preju