The Global Financial Center Index, released last week, showed that New York had supplanted London as the world's premier financial center, albeit by a tiny margin of two points out of 1,000.
With British financial capability hollowed out, and nearly all the major London investment banking operations foreign-owned, it's a change that has been coming for nearly 30 years, and it won't quickly reverse. In the very long run, as well as in the short run, London's changes of the 1980s were highly destructive for one simple reason: the big trading operations, around which the whole restructuring of the City of London revolved, are about to be replaced by machines.
London as a financial center would not be recognizable to those
who knew it 40 years ago. The few merchant banks that still exist are no longer a significant factor in the market. Instead, it is dominated by behemoths oriented primarily towards trading.
Very few of the major institutions are British-owned: there's HSBC, which is headquartered in London but whose profits come overwhelmingly from Asia; Barclays, whose investment-banking operations are struggling and barely profitable; Lloyds, an almost purely retail operation; and RBS, which is government-owned and struggling against insolvency. The commanding heights of international finance, whether capital raising or merger advice, are controlled by the major non-UK houses, mostly American or from continental Europe.
This development was inevitable to those of us who watched in horror the progress of the British bank and securities regulatory "reform" in the 1980s. The merchant banks had been shrunk by the combination of high inflation, high taxes and poor markets in the 1970s. Whereas in 1970 the larger ones had been capitalized at twice the level of the major US investment banks, they were now minnows by comparison.
The well-capitalized British houses, the retail clearing banks, had already demonstrated that they could neither carry out investment banking business effectively nor act as responsible owners of houses that could. More ...
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com. Copyright 2005-14 David W Tice & Associates.)