City fighting to keep its crown: London's status as Europe's pre-eminent financial centre looks solid, but the ambitions of Frankfurt and Paris leave no room for complacency in the Square Mile

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The Independent Online
THE temptation to be complacent about London's position as Europe's leading financial centre was tested on two fronts last week, both from Frankfurt.

Early in the week, the Frankfurt authorities announced plans to criminalise insider trading, bringing its regulatory standards on share dealing up to international standards. A couple of days later, it emerged that the same city is likely to be the host for the forthcoming European Central Bank.

Frankfurt, in particular, likes to think of itself as an increasingly serious rival to London. But the recent controversy surrounding the share speculation by the disgraced trade union leader, Franz Steinkuhler, highlighted yet again its lax regulatory approach - insider trading is, for now, still legal.

This seems to be why the Finance Ministry in Bonn has produced its final discussion document on a proposed law that would introduce prison sentences for insider trading of up to five years, and set up a Federal Supervisory Office for Securities Trading.

However, it would be wrong to suggest that the Germans are moving at lightning speed.

The financial establishment's deep-seated conservatism and lengthy German bureaucratic procedures are combining to make for slow progress.

For instance, the law proposing a Federal office has to be squared with the regional states, which jealously guard the privileges of their own, smaller stock exchanges.

So it is not expected to get through parliament before early next year, or to come into force before the summer of 1994, two years after the deadline set for implementing the relevant EC financial regulation directives.

Attempts to turn Frankfurt into a truly open, international trading centre are progressing, if anything, even more slowly. The Bundesbank is convinced that financial deregulation a la London's Big Bang is a grave mistake. The explosion of short- term financial instruments undermines a culture of longer- term saving, and so weakens the most important bulwark against inflation, it argues.

The result of such thinking is a determination, shared to varying degrees by Frankfurt's big banks, to encourage only a measured, highly controlled process of deregulation.

The central question of whether Frankfurt is prepared to transform itself into a truly international marketplace for Europe is far from answered.

But Frankfurt is not the only centre that would like to tilt at the City's windmill. For years the burghers of Paris have looked longingly across the Channel at the superior size and influence of London; a few months ago they finally did something about it.

A committee of the great and the good of the French financial and industrial establishment has been set up with the express aim of boosting Paris as a financial centre.

Named 'Paris Europlace', and instantly redubbed 'Paris Europlatz' by wags who took a sceptical view of the German dominance of French economic life, it has so far had a modest impact - it has produced the inevitable glossy brochure and logo, commissioned research and started organising conferences.

The idea is to have at least three such promotional exercises each year. The first took place earlier in the month in Paris, another is to follow at the end of the year in New York.

But the threat is greater than it looks. Part of the sub-text of this initiative is explained by the Fr350bn ( pounds 40bn) five-year privatisation programme planned by the French government.

At the moment, Paris's equity market is small and relatively illiquid. Although it is the world's fourth largest after New York, Tokyo and London, it is barely 40 per cent of the size of its nearest rival, the London Stock Exchange.

But the current mass privatisation programme should improve liquidity - it comes to about 18 per cent of the current market capitalisation of the Bourse. There are hopes that the extra business it generates will help Paris to achieve a critical mass.

Paris still faces the problem that the Bourse lacks a solid domestic base of institutional investors. This is because private pension funds are rare - most pension provision is the state's responsibility.

However, most observers expect that to change - the state can no longer afford to carry the burden, and banks and insurance companies are already discussing ways to extend the private sector.

One area where Paris has made particular efforts to compete with London is derivatives. Set up in 1986, the Matif initially gave the London International Financial Futures and Options Exchange (Liffe) a few sleepless nights. Respective volumes of contracts traded by the two were running neck and neck for a while.

But more recently, the French have lost ground to the British who have successfully and aggressively launched and marketed international products.

The relatively weak positions of Frankfurt and Paris - whatever their aspirations - is something clearly recognised on the other side of the pond. Few American bankers seriously imagine that another city will replace London as the biggest financial centre in Europe. Clearly, they like the ease of speaking the same language in London, but they also rate the regulatory environment as an important advantage.

'You couldn't contemplate moving out of London and going to Frankfurt or Paris or Brussels,' commented Richard Roddey, who heads up the European operations of NationsBank, currently the fifth largest bank in the United States. 'If you are in Europe you have to be in London first.'

NationsBank does have an office with 10 staff in Frankfurt, but has expanded its presence in London aggressively in recent years, to its present level of 450 staff. During this expansion Roddey said that 'it didn't cross anyone's mind to be headquartered anywhere but London'.

In foreign exchange dealing,

London is viewed as comfortably ahead in its time zone - and number one in the world.

According to the 1992 central banks' survey of foreign exchange dealing, around dollars 303bn ( pounds 206bn) is traded daily in London, dollars 192bn in New York and dollars 108bn in Tokyo, which leaves Frankfurt and Hong Kong fighting it out for fourth place at dollars 60bn each, and Paris trailing at dollars 35bn.

In fact, most Americans see London both as complementary to their operations in the US, and as a competitor. They see the question as being whether business will leave London for the United States, rather than whether it will migrate elsewhere in Europe.

New York is certainly working hard at encouraging it to do so. For example, the New York Mercantile Exchange is now offering after-hours trading on its crude oil, heating oil and gasoline contracts between 5pm and 8am New York time, in an effort to reinforce its dominance over London's International Petroleum Exchange.

New York has also been taking equity trading business away from London, with the help of its American Depositary Receipts. Depositary banks such as Citibank, JP Morgan and Bank of New York hold the underlying shares, while the US investor buys and sells the dollar- denominated ADRs.

The widespread use of ADRs has moved volume - and the broking commissions that go with it - away from the London Stock Exchange. Last year Glaxo Holdings was the most actively traded of any stock listed in the United States measured by number of shares changing hands, with dollars 15.7bn worth of shares traded during the year.

Ten of the top 20 ADRs by volume traded last year were UK companies, including Hanson, British Petroleum, Wellcome, SmithKline Beecham, Reuters, British Steel and Grand Metropolitan.

In London, the reaction to heightened competition has been muted. True, the boastful trappings of the boom years of the 1980s - the City champagne bars and the weekend country retreats, for instance - are less in evidence these days.

But there is still an inner confidence among those who operate within the Square Mile that it can withstand an apparently growing threat to its dominance.

At the London Stock Exchange, they point to their recent Quality of Markets statistics, showing that in 1992 there were 93 new share issues in London compared with a paltry five in Germany and six in Paris.

'Ninety-three to five, that's all you need to remember,' said one stock exchange insider rather triumphantly.

Moreover, London handled 93.5 per cent of the overseas equity turnover in Europe in 1992, compared with 2.3 per cent on the German exchanges and 1 per cent in Paris.

Among the reasons for London's diversified activity is its favourable time zone position between the Far East and North America. Around 66 per cent of US business is transacted between 8am and noon local time. By midday in New York most European markets are closed.

London has other advantages, too. It is the world's leading centre for bond trading, handling more than 50 per cent of total trades, according to best estimates. And recent Bank of England data show London as the leading centre for cross-border bank lending, with 16.5 per cent of external lending being based in London, ahead of 14.2 per cent in Japan. In 1992, lending from the UK increased by dollars 88bn, whereas lending from Japan fell by dollars 59m.

A spokeswoman for one foreign bank, which has a large presence in London but is not headquartered there, said the large pool of skilled labour for the securities business in London and New York made them especially attractive centres to be based in, with London's less strict labour laws (compared with Frankfurt and Paris) also a big pulling factor.

The point has been driven home by the City Research Project, a three-year London Business School study of the current and prospective future competitive position of London as a leading financial centre.

Its interim report has looked at the impact of labour and property costs, technology, regulation and communications on London's attractiveness as a financial centre.

The team, headed by Professor Richard Brealey, points out that London benefits from the fact that Britain is now a relatively low-wage economy and that employees in the financial sector are paid less than they bring in, in terms of profitability.

The report also notes the way property prices have come down substantially in the area, thanks to the increase in the supply of office space, shifting total costs in London's favour by around 5 per cent.

Another plus point is the favourable legal framework in England - it has become, with New York law, the basis for many international financial contracts.

Some would have it, however, that London, in spite of its head start, is giving its competitors all the help it can to make inroads into its market-place.

In particular, London's reputation has suffered from a number of self-inflicted problems - the troubles at the Lloyd's insurance market, the collapse of BCCI, Asil Nadir's flight from justice, the fiasco over the Maxwell pension funds and the scrapping of Taurus, the City's paperless share settlement project, to name just a few.

Undoubtedly, the failure of Taurus was a particularly serious blow. One senior City figure says that making quick progress on settlement is one of the most urgent tasks facing the City and is exceptionally important for maintaining London's position.

A phased approach is being undertaken, with the first objective being a move to settle share trades within 10 days.

The problems at Lloyd's have not only affected London's reputation, they have also hit the UK's balance of trade. As the problems mounted during the 1980s, Lloyd's went from being a net contributor to the balance of trade of pounds 1.3bn in 1986/87 to being a drain on the trade balance to the tune of pounds 100m five years later.

Yet while most of the scandals and mistakes have been of the City's own making, the threat of IRA terrorist attacks is outside its control and especially worrying.

Earlier this month, it led to the imposition of armed cordons within the Square Mile. One smallish bank says that the threat has increased its insurance and security costs by about pounds 250,000 a year.

Although London enjoys an unparalleled position, many City figures insist that complacency is not a big problem. 'Yes, there is increasing competition from other European centres, but London is getting better at improving the situation here,' said one. 'It is simply not sitting still while others leap ahead, but making strenuous efforts to improve things where necessary.'

That this should continue to be so is vital for the British economy, according to John Wells, the Cambridge University economist at who has for years studied the decline in the UK's manufacturing base.

'The City contributes enormously to the UK's balance of payments and one could not contemplate what the economy would be like without it.' London is viewed as comfortably ahead in its time zone - and number one in the world.

According to the 1992 central banks' survey of foreign exchange dealing, around dollars 303bn ( pounds 206bn) is traded daily in London, dollars 192bn in New York and dollars 108bn in Tokyo, which leaves Frankfurt and Hong Kong fighting it out for fourth place at dollars 60bn each, and Paris trailing at dollars 35bn.

In fact, most Americans see London both as complementary to their operations in the US, and as a competitor. They see the question as being whether business will leave London for the United States, rather than whether it will migrate elsewhere in Europe.

New York is certainly working hard at encouraging it to do so. For example, the New York Mercantile Exchange is now offering after-hours trading on its crude oil, heating oil and gasoline contracts between 5pm and 8am New York time, in an effort to reinforce its dominance over London's International Petroleum Exchange.

New York has also been taking equity trading business away from London, with the help of its American Depositary Receipts. Depositary banks such as Citibank, JP Morgan and Bank of New York hold the underlying shares, while the US investor buys and sells the dollar- denominated ADRs.

The widespread use of ADRs has moved volume - and the broking commissions that go with it - away from the London Stock Exchange. Last year Glaxo Holdings was the most actively traded of any stock listed in the United States measured by number of shares changing hands, with dollars 15.7bn worth of shares traded during the year.

Ten of the top 20 ADRs by volume traded last year were UK companies, including Hanson, British Petroleum, Wellcome, SmithKline Beecham, Reuters, British Steel and Grand Metropolitan.

In London, the reaction to heightened competition has been muted. True, the boastful trappings of the boom years of the 1980s - the City champagne bars and the weekend country retreats, for instance - are less in evidence these days.

But there is still an inner confidence among those who operate within the Square Mile that it can withstand an apparently growing threat to its dominance. At the London Stock Exchange, they point to their recent Quality of Markets statistics, showing that in 1992 there were 93 new share issues in London compared with a paltry five in Germany and six in Paris.

'Ninety-three to five, that's all you need to remember,' said one stock exchange insider rather triumphantly.

Moreover, London handled 93.5 per cent of the overseas equity turnover in Europe in 1992, compared with 2.3 per cent on the German exchanges and 1 per cent in Paris.

Among the reasons for London's diversified activity is its favourable time zone position between the Far East and North America, able to trade relatively long hours with both.

London has other advantages, too. It is the world's leading centre for bond trading, handling more than 50 per cent of total trades, according to best estimates.

And recent Bank of England data show London as the leading centre for cross-border bank lending, with 16.5 per cent of external lending being based in London, ahead of 14.2 per cent in Japan. In 1992, lending from the UK increased by dollars 88bn, whereas lending from Japan fell by dollars 59m.

A spokeswoman for one foreign bank, which has a large presence in London but is not headquartered there, said the large pool of skilled labour for the securities business in London and New York made them especially attractive centres to be based in, with London's less strict labour laws (compared with Frankfurt and Paris) also a big pulling factor.

The point has been driven home by the City Research Project, a three-year London Business School study of the current and prospective future competitive Its interim report has looked at the impact of labour and property costs, technology, regulation and communications on London's attractiveness as a financial centre.

The team, headed by Professor Richard Brealey, points out that London benefits from the fact that Britain is now a relatively low-wage economy and that employees in the financial sector are paid less than they bring in, in terms of profitability.

The report also notes the way property prices have come down substantially in the area, thanks to the increase in the supply of office space, shifting total costs in London's favour by around 5 per cent.

Another plus point is the favourable legal framework in England - it has become, with New York law, the basis for many international financial contracts.

Some would have it, however, that London, in spite of its head start, is giving its competitors all the help it can to make inroads into its market-place.

In particular, London's reputation has suffered from a number of self-inflicted problems - the troubles at the Lloyd's insurance market, the collapse of BCCI, Asil Nadir's flight from justice, the fiasco over the Maxwell pension funds and the scrapping of Taurus, the City's paperless share settlement project, to name just a few.

Undoubtedly, the failure of Taurus was a particularly serious blow. It hit foreign firms where it hurts - on the bottom line.

One senior City figure says that making quick progress on settlement is one of the most urgent tasks facing the City and is exceptionally important for maintaining London's position.

A phased approach is being undertaken, with the first objective being a move to settle share trades within 10 days.

The problems at Lloyd's have not only affected London's reputation, they have also hit the UK's balance of trade. As the problems mounted during the 1980s, Lloyd's went from being a net contributor to the balance of trade of pounds 1.3bn in 1986/87 to being a drain on the trade balance to the tune of pounds 100m five years later.

Yet while most of the scandals and mistakes have been of the City's own making, the threat of IRA terrorist attacks is outside its control and especially worrying.

Earlier this month, it led to the imposition of armed cordons within the Square Mile. One smallish bank says that the threat has increased its insurance and security costs by about pounds 250,000 a year.

Although London enjoys an unparalleled position, many City figures insist that complacency is not a big problem. 'Yes, there is increasing competition from other European centres, but London is getting better at improving the situation here,' said one. 'It is simply not sitting still while others leap ahead, but making strenuous efforts to improve things where necessary.'

That this should continue to be so is vital for the British economy, according to John Wells, the Cambridge University economist at who has for years studied the decline in the UK's manufacturing base.

'The City contributes enormously to the UK's balance of payments and one could not contemplate what the economy would be like without it.'

(Photograph omitted)

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