project Draft 3 SHI Li Shirley0003.docx
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project Draft 3 SHI Li Shirley0003.docx
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projectDraft3SHILiShirley0003
UniversityofReading
Pre-sessionalCourseBlock4
September2012
WhatmakestheCityofLondonstandoutandhowdoesitmaintainitsleadingpositionwhilefacingnewchallenges?
Name:
LiSHI
Studentnumber:
20000003
Tutor:
Jake
Draftnumber:
3rd
Date:
14September2012
Abstract
TheCityofLondon,isitaplaceoranindustry?
WhathasmadetheCityofLondonoutstandingforseveralcenturies?
Howdoesitfacethenewchallenges?
Arethereanyeffectivesolutionsforthoseproblems?
Allthequestionsabovearethemainfocusofthispaper.ThecharacteristicsthatmaketheCityofLondondistinguishedfromotherswillbeelaboratedupon.Challengesandsolutionswillbefurtheranalyzedandsuggestedcorrespondingly.AndthefinaltargetofthispaperistogiveguidanceforthereaderswhotendtohaveageneralideaabouttheCityofLondon.
Introduction
Astheworld’sleadingfinancialcenteralongsideNewYorkCity,Londonhastheworld’sfifth-largestmetropolitanareaGDP,andthelargestinEurope.AllthesecontributionscannotdepartfromaplacecalledtheCityofLondon.Forcenturies,theCityofLondonhasattractedthebulkofthecountry’ssavings,investmentsandfinancialdecisionsingeneral.Morethan300financialinstitutionsgatherintheCityofLondonandmakeitwork,asdescribedbythequote“Financialinstitutionsarewhatmakefinancialmarketswork.…Theythusplayacrucialroleinimprovingtheefficiencyoftheeconomy”(Mishkin&Eakins,2009,p8).ThispaperwilldiscoverthereasonsthatmaketheCityofLondonstandoutcomparedwiththeotherfinancialcentersaroundtheworld.Moreover,itcannotbeignoredthatnewchallengesinthethirdmillenniumemergedalongwitheconomicdevelopmentandtechnologicalinnovations.HowtheCityofLondonmaintainsitsleadingpositiondespitethosethreatsistheothermaintopicofthispaper.Althoughthefinancialenvironmentistoocomplicatedtoanalyzecomprehensively,somesolutionsandfutureperspectiveswillbetriedandproposedafterseriousconsideration.
WhatistheCityofLondon?
BeforewearemovingtothestrengthsoftheCityofLondon,historicalbackgroundsofthedevelopmentofLondonfinancialmarketsneedtobeintroduced.Untilthemid-fourteenthcentury,depositsandcreditpracticesbecamecommonplaceinEnglandwiththeexpansionoftradeduringtheTudorperiod.Rapidgrowthintrade,industryandcolonializationcreatedhugedemandforcapital,andin1694,theBankofEnglandwascreated.Bythemid-nineteenthcenturyLondonhadbecometheleadingcenterofEuropeancommerce,andreplacedAmsterdamasthefinancialandtradingcapitalofEurope(Piesse,Peasnell,&Ward,1995).
TheCityofLondonasthemarkofthishistoryisoftenreferredtoas theCity orthe SquareMile,usedas metonyms fortheUnitedKingdom's financialservices industry.Itisdistinguishedbytwomaincharacteristics:
firstly,itisthebaseofGovernment’smainmonetaryarm.Secondly,itisthefirstchoiceforforeignfinancialinstitutionstoplacetheirrepresentativesandtheworld’scorefinancialmarketwheretheheadofficesarelocated(Clarke,2008).ItiseasytofindsomegiantsoffinanceintheCitysuchastheRoyalExchangeofLloyd’s,LIFFEfinancialfuturesmarket,Guardianinsurancegroupand,ofcourse,theBankofEngland.
“Thereareenormousrangesandvarietyamongthefinancialinstitutionsanditisimpossibletoincludethemallhere.Butforclarity,institutionscanbegroupedtogetherinsomeway,withsomeexcludedaltogether”(Piesse,Peasnell,&Ward,1995,p236).TheCityissetfirmlyintheframeworkofUKfinancialmarketswithintheBritisheconomy.Therefore,astraditionalclassification,financialinstitutionsintheCitycanbeclassifiedintoretailbanking,investmentbanking,buildingsocietiesandfinancehouses,insurance,pensionfundsandotherinvestmentinstitutions.
Fromabroadperspective,thefinancialinstitutionsoftheCityconstructafinancekingdomwhichhasthemainfunctionsincludingenablingmonetarypaymentsfromonepersontoanotherwithinthecountryoracrossfrontiers,investingthefundswhichareattractedfromallpartsoftheUnitedKingdomandoverseas,andofferingavarietyoffinancialinstrumentsandservices.Itcanbeconcludedthat“…itwillsave,invest,finance,insure,ship,trade,buy,sellorhedgeforyou,me,oranyoneelse,onaworldwidebasis”(Clarke,2008,p4).
WhatmakestheCityofLondonstandout?
Inthemodernsociety,financialcenterscanbecategorizedintothreemainareasintermsofregionsandfunctions.Aboveall,theUnitedStatesisthelargesteconomyintheworldintermsofitssizeanddiversityoffinancialmarkets,whicharemainlyconstitutedbythemarketslocatedinNewYorkandtheAmericanstockexchangesinNewYorkCity.Secondly,Europeanfinancialmarkets,whichhaveundergoneaseriesofreformandrestructuring,areledbyLondonandfollowedbyFranceandGermany.Thirdly,Japansecuritiestradingmarketiscomprisedbythreeexchanges,Tokyo,Osaka,andNagoya(99%)respectively.Amongthese,Tokyoisthelargestandmoststableexchangemarketintheworldwithaveryrestrictedmembership(Piesse,Peasnell,&Ward,1995).Generally,UnitedStatesandJapanformthetwomainarmsoftheglobaltime-zonetrianglewithEurope.Comparedwiththosefinancialcentersoftheworld,theCityconcentratesoninternationalfinancialservicesapartfromservicingtheBritisheconomy,andtherangeoffinancialservicestheCityoffersiswiderthanthatofothers.Actually,itisawholesalefinancialcenter.Inaddition,theCitycanbecomparedtotheinterchangebetweentheUSandEurope.
Severalfactorscontributetothislongtermcompetitivenessincludingstablepoliticalenvironment,atime-zoneadvantagewhichisabletodealwiththeFarEastandNorthAmericaonthesameday,freeeconomicandfinancialsystemswhichmakethemarketmoreattractivetointernationalinvestments,goodcommunicationsandworldcontacts,compactnessandswiftdecisionintermsofdistanceandtrust(Clarke,2008),andprofessionalback-upfromUKacademiccirclewhichisalsothepillarindustryofUK.
Fromadetailedviewpoint,LondondistinguishesitselfineverysectorinvolvedfromothercenterssuchasNewYork,Frankfurt,Paris,Tokyo,etc.whichcanbeconcludedbythefollowingdataandfacts(Clarke,2008):
1)In2006,LondonsurpassedFrankfurtandNewYorkintheproportionofinternationalbankingtransactions.
2)Until2008,therewere331foreignbanksrepresentedinLondon,farmorethanothercenters.
3)Londonpossesses34%oftheworld’sturnover,comparedwithNewYork17%,Tokyo8%andFrankfurt3%.
4)Generally,manycountriesundertaketheirowninsurance,anddomesticinsuranceisusuallyundertakenbydomesticfirmsinUSandGermany.However,theLondoninsurancemarketstillmaintainsthelargestshareofinternationalbusinessinmarineandaviation.
5)Londonalsoaccountsforthelargestshareoftheworldin“overthecounter”derivativeturnover,thelargestturnoverofthegoldmarket,andactsasthelargestcenterforinstitutionalequitymanagement.
6)In2008,Londonconstitutedahalfofinternationalshippingfreight‘fixtures’relatingtotankersand50percentofthemarketforsaleandpurchaseofshipsworldwide.Halfoftheworld’sleadingshipfinancebankshadofficesinLondon.
Allinall,asthemarkofLondonfinancialmarkets,theCityofLondonoffersawidevarietyofdifferentservicesavailabletotheworldwidecustomers,incontrasttootherinternationalfinancecenterswhichtendtofocusonanarrowerfield.Asahistoricalcity,LondonmainlyfunctionedthroughtheCityhasbeenplayingacompetitiveroleinworldfinancialmarketsincethe18thcentury,althoughthemaincompetitorhaschangedfromAmsterdamtoNewYork.
Challengesandproblems
Therewillalwaysbechangestointernationalfinancialmarketscausedbyinnovationsoffinancialderivatives,informationtechnologies,andlegislations.Itbringsaboutchallengesaswellasprogresses.TheCityofLondon,similartomostotherfinancialcentersisnotimmunetotheemergingchallenges.Infact,thenumberofchallengesisenormousandcannotbecalculatedonebyone.Thissectionwillfocusonsomecontroversialproblemsforfinancialinstitutionstheseyearslikefinancialcrisis,thesecurityofe-bank,riskmanagement,competitionfromotherfinancialcenters,andconflictsbetweenlowerincomepeopleandthebankers.
Aboveall,financialcrisisisacomplicatedtermwhichisimpossibletobeelaboratedoninashortparagraph,andthecausesseemstobevariousalongwithglobalization.Thesimpleexplanationisthatbecauseofover-investmentandexcessiveexpansionofthemoneysupplyinemergingmarkets,theconfidenceoftheeconomicfuturefell,andshort-termcapital,called‘hotmoney’,withdrew.Whentheshort-termcapitalswithdrewwithinashortperiod,thefinancialcrisisoccurred.Severalcountriesoreconomicareas,forexample,Mexico,SouthKorea,Indonesia,HongKong,RussiaandBrazilexperiencedthefinancialcrisissuccessivelyfromtheyear1994to1998(Valdez,&Wood,2003).Theapparentcommoncharacteristicsofallofthesecrisesarecurrenciesdevaluation,stocksdivingandeconomicgloom.Itseemsthatwhenthefinancialcrisisoccurred,governmentsofthosecountrieshadnoeffectivemeasurestoavoidorsolvethecorrespondingproblemsatthefirsttime,andittakesalongtimeforthewholesocietytogettheeconomyrecovered.TheCityofLondon,withoutanyexception,hadbeenhitbythefinancialcrisisdirectlyorindirectlyduringthelasthalfcentury.
Secondly,du
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