EU directives seen as threat to City's international role

EUROPEAN UNION directives and tighter regulation are the main threats to London as an international banking centre, according to research by the Corporation of London.

A report from the City Research Project, set up two years ago, warns that because London is an international banking centre, rather than one that simply services a domestic economy like Frankfurt and Paris, the UK is uniquely vulnerable to ill-thought- out EU regulations.

The report by Harold Rose of the London Business School says London has retained its share of bank cross-border lending and may be the only truly world banking centre but its market share is being eroded by the development of other centres in Continental Europe and Asia.

Their success is a result of regional economic development and capital market liberalisation, which has diminished London's advantage as a relatively lightly regulated centre. 'It is essential that the application of common regulatory standards, especially by the EC, does not weaken this advantage still further', Professor Rose says.

The only truly international banking centres - ones that have banking facilities far bigger than their domestic economies require - are the UK, Singapore, Switzerland and Indonesia.

European Monetary Union should not damage the City, since the loss of foreign exchange business when European currencies are merged will be more than outweighed by the increase in trading between the ecu, the dollar and the yen, the report says.

The main threat from EC regulation comes from the reliance on capital adequacy ratios, which the City research team sees as increasingly outmoded.

For instance, while banks in London hold equities for making markets in those securities, Continental banks tend to keep them as part of long-term holdings in industrial companies.

The lengthiness of EU decision- making is also dangerous considering the rapidly changing face of international banking, the report warns. The UK authorities and banks should adopt a stance of 'constant vigilance' when the EU is considering financial regulation, the research team concludes.