Half of European investment banking activity is conducted in London. Over 250 foreign banks have offices here, London manages 80% of hedge fund assets under management in Europe, 90% of European prime brokerage and holds the lead in global cross-border bank lending, foreign exchange and OTC derivatives trading


The City of London is supposedly under threat, and with it so much of London’s prosperity. Roger Bootle questions whether we should be seriously worried?


From the beginning, London was international. As the capital of Roman Britain, it acted as some sort of financial centre, facilitating trade with other parts of the Roman Empire passing up and down the Thames.

After the Norman Conquest, London was a major centre for merchants and financiers dealing with other parts of the Plantagenet Empire and beyond. Subsequently, Italian bankers from Lombardy with connections across the whole of Europe and further afield established themselves in the City and gave their name to one of our most famous banking thoroughfares – Lombard Street.

The seventeenth century was the time when modern finance really got going in the City, borrowing ideas, practices and people from what we now call the Netherlands, which was the financial leader at the time, as well as giving a home to many Huguenots fleeing persecution in France. From the establishment of the Bank of England in 1694, the City’s markets grew and grew, financing governments, facilitating England’s trade with Europe and catering for the multifarious trading and financial needs of our burgeoning empire.

During the nineteenth century, London was at the centre of the Gold Standard, under which umpteen countries around the world fixed their currencies to gold. London supplied huge amounts of capital, not only to the countries of the empire but also to the United States, Latin America and just about everywhere else.

In the early twentieth century, things changed. The UK abandoned the Gold Standard in 1914 and again in 1931 (having returned to it briefly in 1925). New York rose in prominence, while London was hammered by the massive financial and economic losses that the UK sustained in two world wars. Moreover, after the Second World War, the UK operated exchange controls, which hampered London’s ability to be an international financial centre.

Mind you, that did not stop London becoming the centre of the euro-dollar market as billions of US dollars were deposited in London in order to get round restrictions that had been placed on banks in the United States by the US Federal Reserve.

When Margaret Thatcher became Prime Minister in 1979, she embarked on a programme of reforms to bolster the forces of competition, including the abolition of exchange controls. London was on its way back.

But for a few years yet it remained pretty sleepy. Different types of financial institution had different, closely circumscribed, roles. Stockjobbers made markets in stocks and shares but weren’t allowed to deal directly with clients; stockbrokers intermediated between


stockjobbers and clients; merchant banks dealt with corporate finance and fund management. The big boys were the clearing banks, but they stayed out of high finance and supplied plain vanilla financial services to individuals and companies. (Perhaps we would all be better off if they had stuck to this restricted sphere of operations.)

All this came to an end with the socalled Big Bang of October 1986, the thirtieth anniversary of which has just passed. This was one of the Thatcher government’s most momentous reforms. It did away with the various distinctions between different institutions and allowed something like a financial freefor- all. After this we were in the era of the so called ‘investment’ bank, and umpteen investment bankers flooded into London.

Not long afterwards, the City started to spread out geographically from its original home in the ancient streets surrounding the Bank of England. Today The City has an eastern branch in Canary Wharf and a western branch in Mayfair and St James’s, where so many hedge funds are now based. And there is even the odd outpost in the environs of Belgravia. When we now speak of ‘the City’, we mean all these different parts as though they were an integrated whole – which I suppose they are.


This varied history should make it clear that the City’s success is far from God-given or inevitable. And it is possible to imagine it fading. But it also reveals something of the City’s resilience. There are now three major threats hanging over the city’s future. The first is quite simply that London could cease to be an attractive place to do business, because the British government administers it and the wider UK badly, and/or due to a deterioration in the London environment
beyond the government’s control.

The second threat is the possibility that, just as has happened with so much of our manufacturing industry, the City loses its edge to newer competitors around the world, especially in Asia.

The answer to these first two threats emerges from consideration of the third and most serious challenge, which derives from the UK’s vote to leave the EU. Here, the vital issues concern socalled ‘passporting rights’, which allow a financial institution with operations in an EU member country to ply its trade in all other member countries of the EU without having operations in them. Banks from all around the world, including the US, Japan and Switzerland, have set up operations in London as a springboard into the European market. After Brexit, unless some special deal is done to maintain passporting rights, this will no longer be possible. This has raised the spectre of a mass exodus of banks from the City.

In practice, I think that none of these


challenges – or even all three rolled into one – will undermine the City. It is still far from clear how serious will be the downside from the loss of passporting rights. At one extreme, there is the possibility that umpteen foreign banks will up sticks and relocate to Paris, Frankfurt or Dublin. At the other, is the possibility that most financial institutions, including banks, will find a way to transfer the bare minimum of jobs and activity to their existing or new continental or Irish operations while continuing to retain the bulk of their European operations in London.

I believe that the outcome is likely to be close to this second extreme. London’s advantages are enormous. First, there is the time zone, with London sitting comfortably between the Asian centres and the United States. This is one factor that makes it difficult for an Asian (or Middle-Eastern) city to usurp London’s role. Admittedly, this is an advantage that Frankfurt, Paris and Dublin also share. But they don’t share all the others, starting with the English language (although I suppose the Irish would claim that they share this one).

Then there is the English legal system which is recognised throughout the world as the best basis for finance and commerce. Next, comes the amazing web of support services including, accountancy, the law, actuaries, software experts, printers – and even economists.

Moreover, the British government and the Bank of England are widely trusted as supervisors and regulators – even though the financial crisis of 2007/9 tested that trust to its limits. Admittedly, the government could do more to improve our infrastructure and housing supply but neither is as bad as the critics suggest and both are set to improve. Nor are London’s competitor cities paragons of virtue in these respects.

Meanwhile, overarching all this is the panoply of other attractions that make London, not just a great city, but the global capital: the theatre, cinema, music, opera, restaurants, galleries, museums, parks, buildings and shops. I don’t know if you, the reader, have ever been to Frankfurt. (I won’t ask if you’ve ever lived there because that would be a contradiction in terms.) No doubt there are many fine things about Frankfurt – and Frankfurters. But no one, not even the Mayor of Frankfurt, could claim that it is the world’s most exciting city. Paris, of course, is much more attractive. But then you have to put up with all that spoken French – as well as the Gauloises, garlic, and M. Hollande’s taxes. Paris cannot hold a candle to London.


All Londoners have a stake in the City’s future, but few larger than the proprietor of Boisdale’s, who has supplied us with oases in the old City, Canary Wharf, Belgravia and now a new venture in Mayfair. Should he be quaking? And should those of us who enliven our days with more than the odd tipple at one or other of these establishments be savouring every moment as our last?

Far from it. The City managed to survive the end of empire; it managed very well after the UK came out of the ERM; it did not suffer at all when the UK did not join the Euro. It is hardly going to wilt because we leave the EU. Indeed, as the EU fades in relative importance in the world economy, the City’s future success will depend less on its role as Europe’s financial capital and more on its role as the financial centre for the thrusting, emerging markets of the world, including China. I am confident that, as so often in the past, it will rise to the challenge.

Roger Bootle is the founder and Chairman of Capital Economics. His latest book is “The Trouble with Europe”, published by Nicholas Brealey roger.bootle@capitaleconomics.com