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, brokers, asset management funds), institutional investors (such as investment managers), as well as central banks. Trading activity takes 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 usually host companies that offer a wide range of financial 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 as soon as one 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 mostly used to indicate a prominent financial centre where such international or cross-border business takes place.
A paper by the International Monetary Fund offers the following definition:
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.
Origins and early developments
International financial centres started an early primitive life in the 11th century in England at the annual fair of St. Giles, then developed in medieval France during the Champaign Fairs. The first real international financial center was the City State of Venice which slowly emerged from the 9th century to its peak in the 14th century. Tradable bonds as a commonly used type of security, was invented by the Italian city-states (such as Venice and Genoa) of the late medieval and early Renaissance periods. In the sixteenth century, the overall economic supremacy of the Italian city-states gradually came to an end and the centre of financial activities in Europe shifted to the Low Countries, first to Bruges, and later to Antwerp and Amsterdam. They, too, became important centres of financial innovation.
Amsterdam and the financial revolution of the Dutch Republic
By the first decades of the 18th century, Amsterdam had become the world's leading commercial and financial centre for more than a century. As the first modern model of a international (global) financial centre, Amsterdam developed a sophisticated financial system with central banking, fully-fledged capital markets, certain kinds of financial derivatives, and publicly traded multinational corporations. As Richard Sylla (2015) noted, “In modern history, several nations had what some of us call financial revolutions. These can be thought of as creating in a short period of time all the key components of a modern financial system. The first was the Dutch Republic four centuries ago.” It was in Amsterdam that the important institutional innovations such as limited-liability joint-stock companies, publicly traded companies, transnational corporations, capital markets (including bond markets and stock markets), central banking system, investment banking system, and investment funds (mutual funds) were systematically operated for the first time in history. Amsterdam – unlike its predecessors such as Bruges, Antwerp, Genoa, and Venice – controlled crucial resources and markets directly, sending its fleets to all quarters of the world. During their Golden Age, the Dutch were responsible for three major institutional innovations in economic and financial history:
The first major innovation was the foundation of the Dutch East India Company (VOC), the world's first publicly traded company, in 1602. As the first listed company (the first company to be ever listed on an official stock exchange), the VOC was the first company to actually issue stock and bonds to the general public. With its pioneering features, the VOC is generally considered a major institutional breakthrough and the model for modern corporations (large-scale business enterprises in particular). And it officially ushered in the era of the modern multinational/transnational corporations that now dominate the world economy.
The second major innovation was the creation of the world's first fully functioning financial market, with the birth of a fully fledged capital market. While the Italian city-states produced the first transferable government bonds, they didn't develop the other ingredient necessary to produce a fully fledged capital market: corporate shareholders. The VOC was the first company in history to actually issue bonds and shares of stock to the general public. The Dutch were also the first to effectively use a fully-fledged capital market (including the bond market and the stock market) to finance companies (such as the VOC and the WIC). It was in seventeenth-century Amsterdam that the global securities market began to take on its modern form. In 1602 the Dutch East India Company (VOC) established an exchange in Amsterdam where VOC stock and bonds could be traded in a secondary market. The establishment of Amsterdam Stock Exchange (also known as Beurs van Hendrick de Keyser in Dutch) by the VOC, has long been recognized as the origin of modern stock exchanges that specialize in creating and sustaining secondary markets in the securities issued by corporations. The process of buying and selling shares (of stock) in the VOC became the basis of the first official stock market in history. It was also in the Dutch Republic that the early techniques of stock-market manipulation were developed. The Dutch pioneered stock futures, stock options, short selling, bear raids, debt-equity swaps, and other speculative instruments. Amsterdam businessman Joseph de la Vega's Confusion of Confusions (1688) was the earliest book about stock trading.
The third major innovation was the establishment of the Bank of Amsterdam (Amsterdamsche Wisselbank in Dutch) in 1609, which led to the introduction of the concept of bank money. The Bank of Amsterdam was arguably the world's first central bank. The Wisselbank's innovations helped lay the foundations for the birth and development of the central banking system that now plays a vital role in the world's economy. Along with a number of subsidiary local banks, it performed many functions of a central banking system. It occupied a central position in the financial world of its day, providing an effective, efficient and trusted system for national and international payments, and introduced the first ever international reserve currency, the bank guilder. Lucien Gillard (2004) calls it the European guilder (le florin européen), and Adam Smith devotes many pages to explaining how the bank guilder works (Smith 1776: 446-455). The model of the Wisselbank as a state bank was adapted throughout Europe, including the Bank of Sweden (1668) and the Bank of England (1694).
By the early 1800s, London officially replaced Amsterdam as the world's leading financial centre. In his book Capitals of Capital (2010), Youssef Cassis argues that the decline and fall of Amsterdam, as the world's foremost financial capital, was one of the dramatic events in history of global finance.
Contemporary finance centers such as London, Amsterdam, Paris, Tokyo and New York, have long histories; today there is 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 the largest national and international financial centres in the 21st century. 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 is little data available to rank financial centres. In recent years many rankings have been developed and published. Two of the most relevant are the Global Financial Centres Index and the International Financial Centres Development Index.
The Global Financial Centres Index is compiled semi-annually by the London-based British think-tank Z/Yen. London has been the top-ranked centre from the index's inception in 2007, except from March 2014 to September 2015, when New York City led.
As of September 2016, the top ten global financial centres are:
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:
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.
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 a prominent and innovative financial centre in Europe in the 17th century.
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.
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).
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.
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, 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, as well as of EIOPA, the EU's supervisory authority for insurances and occupational pension systems.
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 position during the intervening period, focusing on lending to European countries while London focused on lending to the Americas and Asia.
Hong Kong. As a financial centre, Hong Kong has strong links with London and New York City. It developed its financial services 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. Most of the world's 100 largest banks have a presence in the city. Hong Kong is a leading location for initial public offerings, competing with New York City, and also for merger and acquisition activity.
London. London has been a leading international financial centre since the 19th century. For much of this time, it has been a major centre of lending and investment around the world and during the late 20th century played an important role in the development of new financial products such as the Eurobond market in the 1960s and derivatives in the 1990s. English contract law was adopted widely for international finance, with legal services provided in London, and financial institutions located there provided services internationally such as Lloyd's of London for insurance and the Baltic Exchange for shipping.
London continues to maintain a leading position as a financial centre in the 21st century, and maintains the largest trade surplus in financial services around the world. 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, international insurance, trading in gold, silver and base metals through the London bullion market and London Metal Exchange, and international bank lending. London benefits from its position between the Asia and U.S. time zones, and has benefited from its location within the European Union, though this may end following the outcome of the Brexit referendum of 2016 and the decision of the United Kingdom to leave the European Union. As well as the London Stock Exchange, the Bank of England, the second oldest central bank, and the European Banking Authority are based in London, although the latter is expected to move following Brexit.
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).
Madrid. Madrid is the headquarters to the Spanish company Bolsas y Mercados Españoles, which owns the four stock exchanges in Spain, the largest being the Bolsa de Madrid. Trading of equities, derivatives and fixed income securities are linked through the Madrid-based electronic Spanish Stock Market Interconnection System (SIBE), handling more than 90% of all financial transactions. Madrid ranks fourth in European equities market capitalisation, and Madrid’s Stock Exchange is second in terms of number of listed companies, just behind New York Stock Exchange (NYSE plus NASDAQ). As a financial centre, Madrid has extensive links with Latin America and acts as a gateway for many Latin American financial firms to access the EU banking and financial markets.
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.
New York City. Since the middle of the 20th century, New York City, represented by Wall Street, has been described as a leading financial centre. Over the past few decades, with the rise of a multipolar world with new regional powers and global capitalism, numerous financial centres have challenged Wall Street, particularly London and several in Asia, which some analysts believe will be the focus of new worldwide growth. 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, driven in part by the size and financial development of the U.S. economy. The NYSE and NASDAQ are the two largest stock exchanges in the world. New York also leads in hedge fund management; private equity; and the monetary volume of mergers and acquisitions. Several investment banks and investment managers headquartered in New York City are important participants in other financial centres. The New York Federal Reserve Bank, the largest within the Federal Reserve System, regulates financial institutions and implements U.S. monetary policy, which in turn influences the world's economy. The three major global credit rating agencies – Standard and Poor's, Moody's Investor Service, and Fitch Ratings – are headquartered or co-headquartered in New York City, with Fitch being co-headquartered in London.
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 the 19th century.
Seoul. South Korea's capital has developed significantly as a financial centre since the late-2000s recession. In 2009, Seoul ranked 53rd among global financial centres; by 2012, Seoul had risen 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.
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.
Singapore. Singapore has 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. However, the market capitalisation of its stock exchange has been falling since 2014 and several major companies plan to delist.
Sydney. Australia's most populous city is a financial and business services hub not only for Australia but for the Asia-Pacific region. Sydney competes quite closely with other Asia Pacific hubs, however it concentrates a greater portion of Australian-based business in terms of clients and services. Sydney is home to two of Australia's four largest banks, the Commonwealth Bank of Australia and Westpac Banking Corporation, both headquartered in the Sydney CBD. Sydney is also home to 12 of the top 15 asset managers in Australia, Melbourne on the other hand tends to concentrate more of the Australian superannuation funds (pension funds). Sydney is using the large Barangaroo development project on its harbour to further position itself as an Asian Pacific hub. Sydney is also home to the Australian Securities Exchange and an array of brokerage banks which are either headquartered or regionally based in Sydney including Australia's largest investment bank Macquarie Group.
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 centres' 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. As a financial centre, Tokyo has good links with New York City, and London.
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.
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.
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.
New York Times journalist Daniel Gross wrote:
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 centre in Kansas. Charlotte is the second-largest banking centre in the United States, after New York City. Bank of America, the United States' second-largest bank is headquartered here, as well as a secondary headquarters for Wells Fargo. BB&T, MetLife, TIAA-CREF, and SunTrust Banks all have a major corporate presence in the city.
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.
