Hamish McRae: Just think what the City has done for us

What is Britain's biggest export industry? Engineering? Oil? Tourism? Er, no. It is banking. Since this is the week of the bank results there has been, understandably, tremendous attention paid to bank profits, bonuses, whether or not they are lending enough to small and medium-sized companies and so on. There have been a predictable amount of abuse about the banks and some points in their defence: do we really want banks to lend to people or companies they don't think will be able to repay? People will have their own views about all this and I am not sure that it adds to the sum of human happiness to add further to the debate here.

But what there has not been at all is any reporting of some remarkable statistics about the foreign earnings of the banks and other financial institutions. They came out on Monday. These are official numbers, collected by the Office for National Statistics, that are part of the stats in the annual Balance of Payments "Pink Book", published each year. That full report comes out next month but we are given a preview of financial earnings by an organisation called TheCityUK, an independent body that promotes these industries.

Let me give you the numbers. Last year the UK ran a trade deficit in goods of £82bn. In short we imported that amount more of cars, food, raw materials and so on than we exported. But more than half that deficit was covered by the net foreign earnings of financial services, which came to £41.8bn. So "the City", let's use that term because it is so often reviled, paid for half of the country's trade gap. It did so even in an exceptionally difficult year, for though the surplus was down on the record £50.6bn of 2008, it was still the second-highest ever in the City's history.

What might surprise you even more is banking's role in all this. The banks earned a surplus of more that £25bn, or more than half the total. Insurance had a record year, with a surplus of £8.3bn, fund managers produced £2.9bn and securities traders £1.4bn. If you add in other City services, plus the lawyers and accountants, the total net earnings rise to £47bn.

This surplus is far larger than that of any other country. We are followed by Luxembourg (which does a lot of Germany's financial business), Switzerland and Hong Kong, but they are all far behind. On a quick tally, I calculate that the UK's balance of payments' surplus on financial services last year was larger than all the surpluses of the rest of the world put together. Call me nerdy but I find these sorts of statistics absolutely fascinating. So I checked with the PR company that put them out to see how many people had picked them up. The answer was there was nothing in the print media, only a small reference on the wire service Bloomberg. So what's up?

There are at least four problems. One is that people find it hard to understand that trade in services, so-called "invisible trade", is as important as physical trade that is loaded on and off ships, lorries and aircraft. That has long been a problem, and why the Committee on Invisible Exports was created as far back as 1968.

A second is that big numbers – and these ones are huge – are harder to get one's head around than ones that we can sort of relate to in our lives. Talk about £1m and you know it buys you a nice house – a very nice house outside London. Talk about £50bn and it is to most people quite meaningless.

The third is that this method of releasing financial earnings ahead of the full balance of payments' stats does not work. The idea of publishing these separately was because the City's earnings tended to get lost in the mass of information in the Pink Book – good try but it has not succeeded in its aim. It is also odd that such an important part of the economy is represented by a small independently financed body. There is a detailed job to be done here to stitch together City representation, for at the moment the whole thing is far too fragmented between the Government, the Bank of England, the City Corporation, London First and so on.

And finally, well, we find it hard as a country to celebrate success. Our attitude towards the financial services industry is ambivalent at the moment for obvious reasons. But once our banks are back on their feet and the nationalised ones have been sold back at a profit to the private sector, then maybe we can be rational about this industry and try and understand its significance.

Look to hedge funds for banking's future

If banks are in the dog house, hedge funds are beyond the gates. Actually one of the great surprises of the financial crisis was that it was the old institutions – commercial and investment banks – that had to be rescued and not the new ones, in particular the hedge funds. Indeed not one single hedge fund anywhere in the world has, as far as I know, taken taxpayers' money. So why the hostility?

Well it is partly that the successful ones make so much money. I recall sitting opposite a senior British official, who should have known better since he was sitting on a pension pot worth several million, banging on about how outrageous their earnings were. But it is also that we don't understand how they work.

So a welcome to a book that explains it, More Money Than God, by Sebastian Mallaby. It is a general history, a story about the main players, including legendary figures such as George Soros, but also a number of other less well-known figures. It looks the role of Alan Greenspan at the Fed in helping create the circumstances under which these institutions flourished and of course at the way the industry unravelled. But – and this is Mallaby's big message – since these institutions came through the crisis in better shape than their older rivals, they will be at the core of our financial system in the future.


For further reading

'More Money Than God', by Sebastian Mallaby (Penguin Press, 2010)