Brexit The City of London & Finance: De-Risking The Ravens

The historic Tower of London sits on the eastern fringes of the City of London on the north side of Tower Bridge. Legend has it the Tower will fall if the six resident ravens were ever to leave the fortress which houses the Crown jewels.  It was Charles II who first insisted the ravens should be protected. With a pragmatic degree of de risking, the Tower of London tends to hold 7 (6 plus a ‘spare’). Moreover, and further helping reduce this perceived possibility of collapse, the resident ravens typically have one flight wing clipped to ensure they can only ascend short distances to perch within the castle itself. Pre-emptive risk management in action, as it were.

This form of pragmatism has served the Tower well and indeed the square mile of financial powerhouse adjacent to the Tower of London itself. Then again, when it comes to actually being an international financial centre, it’s difficult to compete with London, whether on the basis of its current vast service offering, or indeed the incredible history of financial dealing that has taken place there. Take the Guildhall, that wondrous edifice which houses the City of London Corporation’s headquarters and various magnificent rooms around its expansive estate. Essentially some form of financial enterprise has stood there since the time of the ancient Romans. Okay perhaps that  is not so impressive to the Maltese culture where we can see clear evidence of those free trading trailblazers the Phoenicians. However, consider this vignette for a moment:

Back in the late 1990’s the head of a London exchange wanted to organise a party on December 31st 1999 - which was quite the rage in those heady pre-millennial days. It occurred to the CEO that it may be worth checking if the City of London itself had any plans. An exchange liaison called his opposite number in the City Corporation and was politely informed that there were no plans he was aware of...However, perhaps the exchange could call back in a week when said City chap had checked with the City’s bosses if they had any plans of which he was unaware. The Corporation’s representative then delivered a delightful line on millennial celebrations. “In the meantime, let me check in the archives and see what we did last time.”

Between whatever they celebrated on December 31st 999AD to the present, the history of the City of London has been consistent as an epicentre of world finance. Others may have led at different times and certainly the UK was far from the most powerful empire throughout the previous millennium but it has had a consistency of dealing which by the Victorian era helped springboard the UK to prominence as far and away the greatest financial centre in the world. Aided by the British empire and of course English as a common language, the City went from strength to strength. That said the City by 1960 was looking a touch worn and down at heel by comparison, as the loss of Britain’s empire left the City somewhat adrift. At that time America’s industrial hegemony of the previous century was writ large and the UK was in decline… However, as had been the story many times before, the UK found new niches away from purely Imperial commerce. When the Kennedy administration sought to restrict dealing in US dollars, the “Euromarket” was born with London at its core while the rebirth of Britain’s economy fuelled by Mrs Thatcher led to the City of London’s “Big Bang” a deregulatory process which successfully consigned to history the sheer embarrassment of Britain’s IMF bailout in 1976 less than a decade before.

Just as markets never move in straight lines, so too the history of the City has seen ups and downs but at the same time, the resilience of that square mile which maintains the records of 1000 years of trading and more has never been in doubt. In the modern world of digital finance London remains a leader, by far the largest international financial centre on earth. The square mile has expanded to the east into Canary Wharf and despite electronic markets claiming the jobs of many, there are more working in financial markets than ever before in the UK. As a simple benchmark for London’s success, the City trades around twice as much foreign exchange as the US for instance.

Nobody can doubt that the USA is the biggest economy on earth and its major financial centre in New York reflects that by being pretty close to London in overall size. However the City of London has built its reputation on cross border trade. Thus before the Euro at least a quarter of French government bonds traded daily in London while even today 65% or more of specialist (“OTC”) derivatives denominated in the likes of the Polish Zloty currency, are cleared in London. When it comes to trading the Euro currency,the City of London has 70% market share, Paris and Frankfurt have a derisory 11% and 7% respectively. 

We could continue to compare facts like this all day long - and generally on any scale, they demonstrate the City of London as the world’s international financial centre powerhouse. That powerhouse is not merely the product of 1000 years of evolution, it is also strong thanks to legal protection afforded by Anglo Saxon law (the World Bank list the UK as 4th in shareholder protection, behind only Hong Kong, New Zealand and Singapore) whereas France is 29th, Germany 49th. Yes these things can change but it can take decades to make that work, even if the political will is there to make the change to protect creditors and shareholders.

Much conversation in European financial centres is somewhat understandably fixated upon Brexit. However, it is monstrously simplistic to suggest that the City of London is now in some form of tailspin and continental European financial centres are in the ascendant because the UK is leaving the EU. After all Britain has achieved utter dominance in trading the Euro without ever being in the EU’s common currency project!

Brexit clearly means change at many levels and some will move businesses in whole or part to focus on whatever new reality emerges from the negotiation process. However, it would be a very foolish person who argues that the EU’s 60 year post World War II project will rapidly take enormous business from the City of London powerhouse. Nevertheless niche opportunities abound and it is here that smaller financial centres such as Malta may be able to profit from the change wrought by Brexit.