he city
of London and its role as a financial center
Chapter 1.
Introduction. The Concept
of the City of London.
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Britain is a major
financial centre providing a wide range of specialised services. The country’s
economy has for a long time been directed through the great financial
institutions which together are known as “The City”, capital “C”, and which
are mainly located in the famous “Square Mile” of the City of London.
The “Square Mile” in the
Roman Times historically emerged on the Thames as the business and industrial
nucleus of the future London. Through centuries of business and religious
developments the City assumed its role of the world commercial centre as it is
known today . When in the 20th century Great Britain lost its
empire and other financial centres got established in the world, the city
adapted itself to changed circumstances to remain a world financial leader.
The City of London has the greatest concentration of banks in the world
(responsible for about a quarter of total international bank lending) , the
world’ s biggest insurance market (with about 1/5 of the international market
), a Stock Exchange with a larger listing of securities than any other
exchange, and it remains the principal international centre for transactions
in a large number of commodities. A large proportion of Britain’s wealth has
been invested by the City overseas. The City’s annual foreign income roughly
double that of the British manufacturing industries. The above proves the
City’s world significance as a financial centre. Geographically the City is a
large office area bubbling with life at daytime and comfortably quiet outside
the office hours. It’s historical sights like the Tower of London, St Paul’s
Cathedral, the Museum of London, the Monument and others as well as the
beautifully impressive architecture of the office buildings attract crowds of
visitors. The only housing project, the Barbican, provides very expensive
accommodation along with an arts centre, a school and some official premises.
Since after the mid - 80s
financial and related services have started to expand outside the “Square Mile”
though the City of London remains the symbol and actual reality of the
country’s power.
C
h a p t e r 2
Britain’s Economic and
Financial Position Today at Home and Abroad.
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Finance and industry of
the British economy go hand in hand as industry requires a diversified network
of financial institutions to develop successfully. Although Britain’s
financial power today exceeds that of the country’s industrial achievement,
the country was for years “the workshop of the world”. It still remains a
highly industrialised country but the end of the 20th century saw
tendencies for the economic decline.
Historically, after two
world wars and the loss of its empire Britain found it increasingly difficult
to maintain its leading position in Europe. The growing competition from the
United States and later Japan aggravated the country’s position.
Britain struggled to find
a balance between the governments intervention in the economy and almost
completely free-market economy of the United States. The theories of
the great British pre-war economist J. M. Keynes stated that capitalist society
could only survive if the government controlled, managed and even planned much
of its economy. These ideas failed to get Britain out of the image of a
country with quiet market towns linked by steam trains puffing slowly through
green meadows. Arrival of Margaret Thatcher, the Conservative prime-minister
in office between 1979 and 1990, discarded these theories as completely wrong.
Mrs. Thatcher claimed that all controls and regulations of the economy should
be removed and a market economy should recover. Her targets were nationalised
industries. She refused to assist the struggling enterprises of the coal and
steal industries which were slimmed down in order to improve their efficiency.
In the steel industry, for example, the workspace was reduced from 130000
people to 50000 by 1990s and the production of 1 ton of steel by 1990 took
only 3,7 man hours instead of 12 man hours in 1980. The government believed
that privatisation would increase efficiency and economic freedom would
encourage private initiative. A lot of big publicly owned production and service
companies such as British Telecommunications, British Gas, British Airways,
Rolls Royce and even British regional Water Authorities were sold into private
hands. Britain began to turn into a country of shareholders. Between 1979 and
1992 the proportion of the population owning shares increased from 7 % to 24%.
The Conservative
government reduced the income tax from 33% to 25% as an incentive in
production. This did not lead to any loss of revenue, since at the lower rates
fewer people tried to avoid tax. At the same time the government doubled the
VAT on goods and services to 15%. Today it is 17%.
Small business began to
increase rapidly. In 1984 for example there was a total of 1.4 million small
business though including “the black economy” the figure was nearer to
million. Proportionately, however, there were 50% more of them in West Germany
and the United States and about twice more in France and Japan.
Many small businesses fail
to survive mainly as a result of poor management and also because compared with
other European Community Britain offers the least encouraging conditions. But
small businesses are important because they can grow into big ones and because
they provide over half of the new jobs. It is particularly important because
unemployment in Great Britain rose to nearly 2.5 million people and a lot of
jobs are part-time.
Energy is a major
component of the economy, which depended mainly on coal production until 1975,
began to rely on oil and gas discoveries in the north sea. Coal still remains
the single most important source of energy, in spite of its relative decline as
an industry, so oil and coal each account for about one third of total energy
consumption in Britain. Over a number of years British policy makers promoted
the idea of energy coming of different sources. One of them was nuclear energy
as a clean and safe solution to energy needs. In fact Britain constructed the
world’s first large scale nuclear plant in 1956. However, there were a lot of
public worries after the US disaster at Three Miles Island and the Soviet
disaster in Chernobyl. Also nuclear research and safe technology is proved to
be very expensive - by 1990 the real commercial cost of nuclear plant was twice
as high that of a coal power station. Renewable energy sources such as wind or
solar energy, are planned to provide 1% of the national energy requirements in
the year 2000.
Research and development
(R&D) in Britain are Mainly directed towards immediate practical problems.
In fact British companies spend less on R&D than any European competitors.
At the end of the 1980’s, for example 71% of German companies were spending
more than 5% of their annual revenue on R & D compared with only 28% of
British companies. As a result Britain has been automating more slowly than her
rivals. In fact it may be the consequence of Margaret Thatcher’s views on
public spending which includes medical service, social spending, education and
R&D. “The Iron lady” argued that “if our objective is to have a prosperous
and expanding economy, we must recognise that high public spending kills growth
of industry”, as money is taken from the productive sector (industry) to be
transferred to unproductive part of it. As a result in the 80’s only 6% of
Britain’s labour had a university degree against 18% in America, 13% in Japan
and 10% in Germany. Technical education has always been compared with Britain’s
major competitors. According to government study “ mechanical engineering is
low and production engineers are regarded as the Cinderella of the profession”.
Very few school leavers received vocational training. Since 1980’s among
university graduates the tendency has been to go from the civil service to
merchant banking, rather than industry. And according to analysts resulted from
the long-standing cultural roots. Public school leavers considered themselves
“gentlemen” too long to adjust fast to the changes of time. Efforts are now
taken by the labour government to boost technical and enterprise skills in
schools. The 1999 Pre-budget report outlined a 10 million pounds for the
purpose.
Despite the favourable
effect of “Thatcherism” Britain’s economic problems in the 1990s seemed to be
difficult. Manufacturing was more efficient but Britain’s balance of payments
was unhealthy, imports of manufacturing goods rose by 40%, and British exports
could hardly compete with those of its competitors.
Car workers in Germany, for instance, could produce a Ford Escort in help the
time taken in Britain. In the 90’s among the European countries
British average annual productivity per worker took the 6th place.
The revenue softened the social problems but distracted Britain from investing
more into industry. Many analysts thought that much more should have been
invested into engineering production, managerial and marketing
before
the North Sea oil declined.
The Labour government
undertakes to improve the situation. In his Pre-budget report on 9 November
1999 the Chancellor of the Exchequer Gordon Brown set out new economic
ambitions for the next decade. Under them Britain will raise its
productivity faster than its competitors to close the productivity gap and a
majority of Britain’s school and college leavers will go on to higher
education.
In the 80s British
companies invested heavily abroad while foreign investments in Britain
increased too. Today in a speech in Tokyo on 6
September1999 the Foreign Secretary Robin Cook said that “Britain is a chosen
country for more investment from Japan than anywhere else in Europe and more
than thousand companies operate in the U. K.”
Mr. Cook added that the
huge European Market of 370 million people was “the largest single market in
the world, a market that is set to expand even further with the arrival of new
member states”. In fact he said investment in Britain is the highest bridge
into Europe.
Britain as a world leader
in “high-tech” industries
One of the three British
microprocessor producers was making 70% of British silicon wafers required for
new information technology even in the seventies. On Nov.3.1999 Techmark, a new
technology market, was launched at the London Stock Exchange. According to
Gordon Brown, Chancellor of the Exchequer, Techmark will be the London Stock
Exchange “market within a market” for innovative technological companies.
The specialised institutions are
agencies created
to meet the needs of specific
groups of borrowers mostly industrial and commercial - which are not adequately
covered by other institutions. They operate in both public and private sectors.
In general they offer alternative funding to that provided by banks and
building societies. Some of them were set up with Government support and with
financial backing from banks and other financial institutions. Some public
sector agencies offer financial support to industry in Scotland, Wales, and
Northern Ireland.
The main private sector
institutions are finance houses and leasing companies, factoring companies,
finance corporations and Venture Capital Companies.
Finance houses are major suppliers of
hire-purchase finance for the personal sector of short term credit and leasing
to the corporate sector.
Leasing companies buy and own equipment
required and chosen by businesses and lease it at an agreed rental rate.
Factoring companies provide cash for a
company in exchange for the sums they owe. A factoring company buys up a
client’s invoices as they arise and finances up to 80% of the value of the
invoices; the rest is paid after a period, after deduction of administration
and finance charges.
Finance corporations meet the need for medium
and long term capital when such funds are not easily or directly available from
traditional sources such as the Stock Exchange or banks.
Venture Capital Companies offer medium term and
long term equity financing for new and developing businesses when such funds
are not readily available from banks and other traditional sources. The British
Venture Capital Association has 103 full members, which make up over 99% of the
industry.
Financial markets is a collection of
sophisticated securities, futures and options the money market, the euro
currency market, Lloyd’s insurance market, the foreign exchange market and
markets in bullion and commodities.
The Stock Exchange
The origin of the London
Stock Exchange goes back to the coffee houses of the seventeenth century where
those who wished to invest or raise money bought and sold shares in joint stock
companies. Brokers later opened their own subscription Economy of the country has been
directed through the City which is the nerve center of the national finance.
The greater part of the country’s income comes from invisible exports -
operations originating from the City and flowing through its channels.
A large proportion of
Britain’s wealth has been invested by the City overseas. A number of banking
institutions have their head offices in Britain but operate mainly abroad in
particular regions such as Latin America or East Asia through extensive branch
networks. The major bank in this sector is Standard Chartered. This shows how
the City of London expands its activities beyond the country’s borders; the
same goes for the influence of the London Stock Exchange and Commodities
Exchanges (particulars of the City of London as a financial center will be
dealt with in Chapter three).
Chapter
3.
The City of London as a
Financial Center, its Main Institutions.
There has been a long tradition in
Britain of directing the economy through the great financial institutions together known as
“the City”, which until 1997 were located in the “Square Mile” of the City of
London. This remains broadly the case today, though the markets for financial
and related services have grown and diversified greatly.
Banks, insurance
companies, the Stock Exchange, money markets, commodity shipping and freight
markets and other kinds of financial institutions are concentrated in the
solemn buildings of the City and beyond its borders. The City of London is the
largest financial center in Europe. London is also the world’s largest
international insurance market and has the biggest foreign exchange market.
Britain’s financial
service industry gives about 6.5 % of its gross domestic products (GDP) and
contributes some 35 thousand million pounds a year. The largest contributors
are banks, insurance, institutions pension funds, and securities dealers. To
help Britain’s financial services to respond to the competition and at the same
time to protect the public investment, the Government introduced 3 pieces of
legislation to supervise financing the industry: the Financial Services Act
(1986), the Building Societies Act (1986) and the Banking Act (1987). Under
these acts investment businesses need to be authorized and they have to obey
rules set in the legislation. The main responsibility to supervise were the
Bank of England, the Building Societies Commission, the Treasury and the
Department of Trade and Industry. The Serious Fraud office was set up to
investigate and prosecute significant and complex fraud.
The Bank of England.
The Bank of England was
established in 1684 by Act of Parliament and Royal Charter as a corporate body.
Its entire capital stock was acquired by the Government under the Bank of
England Act in 1946. It is the heart of the City of London and Britain’s
central bank. The Bank’s main functions are to execute monetary policy, to act
as banker to the Government, to issue banknote and to provide central Banking
facilities
for the banking system
that is the Bank is responsible for the financial system as a whole; it is
“lender of last resort”. The Bank’s main objective is to support the Government
in achieving low inflation. Unlike some other central banks the Bank can not
act independently of the Government. Decisions on changes in the interest rates
are taken by the Chancellor of Exchequer. The Bank’s role is to advise the
Chancellor and to carry out his decisions. The 1999 (November) interest rate
was 5.5%.
As banker to the
Government the Bank of England is responsible for managing the National Debt.
It has the sole right in England and Wales to issue banknote. The note issue is
no longer backed by gold but the Government and other securities. The Scottish
and Northern Ireland Banks have limited rights to issue notes and those must be
fully covered by holdings of the Bank of England notes. Coins can be provided
by the Royal Mint.
The Bank of England can
influence money market conditions through discount houses. If on any day there
is a shortage of cash in Banking system, the bank relieves the shortage either
by buying bills from the discount houses or lending directly to them.
The Bank of England is
responsible for supervision of the main wholesale markets in London for money,
foreign exchange or gold bullion.
On behalf of the Treasury
the Bank manages the Exchange Equalization Account (EEA). Using the resources
of EEA the Bank may intervene in the foreign exchange markets to check undue
fluctuations in the exchange rate of sterling.
Discount Houses.
The Discount Houses are
unique to the City of London (and to Britain as a country). They occupy the
central position in the British monetary system. They act as intermediaries
between the Bank of England and the rest of the banking sector promoting an
orderly flow of funds between the Government and the banks. In return for
acting as intermediaries the discount houses have privileged daily access to
the Bank of England as “lender of last resort”.
Banks.
Banks in Britain developed
from the London gold miths of the 17th century. By the 1920s and the
1930s there were five large clearing banks with a network across the country.
In February 1996 there were 539 institutions authorized under the Banking. Act
of 1987. In British
banking retail banks should be described as dominant.
Retail banks primarily serve personal
customers and small to medium-sized businesses. They operate through more than 11.350 branchers offering
cash deposits withdrawl facilities and systems for transferring funds. They
provide current accounts, deposit accounts various types of loan arrangements
and a growing range of financial services.
The main banks in England and Wales are
Barklays, Lloyds, Midland, National Westminter and the TSB group. The major
Scottish banks are the Bank of Scotland, Clydesdale and Royal Bank of Scotland.
With a relaxation of
restrictions on competition among financial institutions major banks have
diversified the services they provide. They have lent more money for house
purchases, have more interests in leasing and factoring companies, merchant
banks, securities dealers, insurance and trust companies. They provide low
facilities to industrial companies ands now support a loan guarantee scheme
under which 70% of the value of loans to small companies is guaranteed by the
Government.
Plastic card technology
has revolutionized cash transfer and payments systems. There are around ninety
two million plastic cards in circulation in Britain. There are different types
of cards but they often combine functions. Cards can be used overseas too to
obtain cash from bank ATM ( Automated Teller Machines). Cash machine cards have
greatly improved customers’ access to cash. All retail banks and building
societies participate in nation wide networks of ATMs. About two thirds of cash
now is obtained through Britain’s twenty one thousand ATMs. .A lot of them are
located different places at supermarkets, for instance.
Many banks offer
electronic payment of cheques, telephone banking, under which customers use a
telephone to obtain account information, make transfers or pay bills. Other
innovations include computer-based banking (through home computer) services
over Internet and video links.
Merchant banks.
The traditional role of
merchant banks was to accept bills of exchange, to provide funds for trade and
also to raise capital to British companies through the issue of bonds and other
securities. These activities continue, but the role of Britain’s merchant banks
has diversified enormously in recent years. Although they are called “banks”
they are more involved in providing a range of professional services, such as
corporate finance and investment management, than in lending money.
Building societies.
Building societies are
mutual institutions owned by their savers and borrowers. They have
traditionally concentrated on housing finance, long-term mortgage loans against
property - most usually houses purchased for occupation. Services have been
extended into other areas, including banking, investment services and
insurance. The Societies are one of the main places were people deposit their
savings - around 60% of adults have a building society saving accounts.
Building societies offer a variety of accounts with interest rates related to
the time for which a saver is prepared to tie up his money. So they are major
lenders for house purchases. Four of the largest Societies are planning to
become banks. The largest Societies, the Halifax, Abbey National and Nationwide
owe 45% of the total assets of the movement.
National Savings Bank.
The National Savings Bank
is run by the department of National Savings. It provides a system of
depositing and withdrawing savings at twenty thousand post offices around the
country or by post. The National Savings Bank does not offer lending
facilities. Its deposits are used to finance the Governments public sector
needs.
Investing Institutions.
The investing institutions
are those which collect savings and invest them into securities market and
other long-term assets. The main investment institutions are insurance
companies, pension funds, unit trusts and investment trusts. Together they make
a vast resource of funds which are invested in securities and other assets.
They own around 58% of British shares. The British insurance industry is highly
sophisticated and serves millions of policyholders in Britain and overseas.
Policyholders include governments, companies and individuals. The British
insurance is the forth largest in the world and in proportion to its GDP is the
highest in any country. There are 2 broad categories of insurance: long-term
insurance for many years, such as life insurance, permanent health (medical)
insurance; and general insurance for a year or less, which covers risks of
damage, such as loss of property, accidents and short-term health insurance. In
1995 there were about 830 authorized to carry on insurance business in Britain.
The industry as a whole employs some 207.000 people, plus about 126.000 are
employed in activities related to insurance.
Lloyd’s is an incorporated
society of private insurers in London. Originally it dealt with marine
insurance. Today it deals with other classes of insurance, today it deals with
other classes of insurance. Long-term life and financial guarantee business is
not covered. Insurance brokers as intermediaries are a valuable part of the
insurance market. Lloyd’s insurance brokers play an important role in the
Lloyd’s market.
Institute of London
Underwriters was formed in 1984 as an association for marine underwriters.
Today it provides a market where member insurance companies transact marine,
energy, commercial transport and aviation insurance business. The Institute
issues combined policies in its own name on risks which are underwritten by
member companies. About half of the 58 member companies are branches or
subsidiaries of overseas companies.
Pension Funds.
Pension Funds collect
savings Pension Funds collect savings from occupational pension schemes and
personal pension schemes. Pension contributions are invested through
intermediaries in securities and other investment markets. Pension fund have a
become a major force in securities markets because they hold about 28% of the
securities listed on the London Stock Exchange. Total Pension fund assets are
very big. To protect them the Pensions Act was introduced in 1995 to increase
confidence in the security of the funds.
Investment trusts and unit
trusts.
Both investment trusts and
unit trusts offer investors the opportunity to benefit from pools investments,
although their respective structures are somewhat different. Assets have grown
considerably in the last few years. So individuals are attracted by the
possibility to invest rather small amounts either on a regular basis, usually
monthly, or in a lump sum.
Investment trusts
companies are companies which are listed on the London Stock Exchange and must
invest mostly in securities for the benefit of their shareholders. The trusts
are exempt from tax on money which they get within the trusts. Some trusts specialize
in particular geographical areas or in particular markets. At the end of June
1996 there were about 350 investment trusts companies listed on the London
Stock Exchange.
In unit trusts the
investors’ fund are pooled together but are divided into units of equal size.
Unit trusts are open ended collective funds where the funds are managed by
management groups. The unit trust sector has grown rapidly in recent years.
Nearly three million people are estimated to have holdings in unit group.
Specialized institutions.
The origin of the London
Stock Exchange goes back to the coffee houses of the 17th century,
where those who those who wished to invest or raise money bought and sold
shares of joint-stock companies. Brokers later opened their own subscription
rooms and in 1773 this was named the Stock Exchange. During the 19th
century the Stock Exchange developed as the demand for capitol grew with
Britain’s Industrial Revolution. The Exchange also financed the construction of
railways, bridges and dams across the world. Today it is one of a number of
highly organized financial markets of the City. It provides trading platform
and the means of raising capital for British and foreign companies, Government
securities, eurobonds and depository receipts. Official list is the Exchanges
main market, while AIM, the Exchanges new market is for smaller rapidly
growing companies. It opened in 1995. Companies which apply for a listing on
the Exchange must provide a full picture of their operations, i9ncluding their
financial record, management and business prospects. If a company wants to join
AIM the rules are less strict. Such companies include multimedia and high
technology business.
Today the Exchange has
moved away from face-to-face dealing on the trading floor to system of dealing
from member firms’ offices. The quotations are displayed on electronic screen.
Before 1986 only British companies were allowed to operate. In 1986 deregulation,
known as “the Big Bang” allowed any foreign financial institution to
participate in the London money market. Other changes involved a system under
which negotiated commissions were allowed instead of fixed rates and dealers
are permitted to trade in securities both as principals and as agents.
Traditional retail stockbrokers are facing growing competition from operations
running by large banks and building societies.
The Exchange has its
administrative center in London, with regional offices in Belfast, Birmingham,
Glasgow, Leads and Manchester.
Many companies raise new
capital on the London money market. The quiet-edged market, that is the market
of Government shares, allows the Government to raise money by issuing stock
through the Bank of England.
The Exchanges now going
through a further period of change which has been described as the most
significant period since “The Big Bang”.
Money markets.
London’s money markets
channel wholesale short-term funds between lenders and borrows. These
operations are conducted by all the major banks and financial institutions. The
Bank of England regulates the market. There is no physical market place;
negotiations are conducted mostly by telephone or through automated dealing
systems. The main financial instruments are CDs (Certificates of Deposit),
bills of exchange, Treasury and local authority bills and short-term Government
stocks.
Financial Futures and
Traded Options.
Financial futures are legal contracts for
the purchase or the sale of financial products, on a specified future date at
a price agreed in the present. Trading and financial futures developed out of
the numerous futures markets in commodities which originate from London’s
position as a port and from Britain’s need to import food and raw material.
Options are contracts which give
the right to buy or sell financial instruments or physical commodities for a
stated period at a predetermined price.
Financial futures and
options are traded on the London International Futures and Option Exchange
(LIFFE) which was established in 1982..
Commodity Exchanges
Britain remains the
principal international center for transactions in a large number of
commodities, though the consignments themselves never pass through the ports of
Britain. The need for close links with sources of finance, shipping and
insurance services often determines the locations of these markets in the City
of London. There are futures markets in cocoa, coffee, grains, rubber, sugar,
pigmeat, potatoes there.
petroleum are traded through the International Petroleum Exchange, Europe’s
only energy futures exchange.
Copper, lead, zinc,
nickel, aluminum, aluminum alloys and tin are treaded through the London Metal
Exchange (LME), the world’s largest non-ferrous base metals exchange.
The Baltic Exchange is the
world’s leading international shipping exchange. It contributed to 292 Mln
pounds in net overseas earnings to Britain’s balance of payments in 1995.
Baltic dealers handle more than a half the world’s bulk cargo, transportation of
oil, ore, coal and grain. All Britain’s agricultural futures markets are
operated from the Baltic Exchange and physical trading and commodities is also
carried out there.
Chapter
4.
The International Role of
the City of London in the World Monetary and Currency Fields.
A recent comprehensive
study of four world cities - London, Paris, New York and Tokyo - confirmed many
strength of London and described it as possibly the most international of all
world cities. The study said that London and New York are the only two pre-eminent
international financial centers with advantages over other cities. One city
that is emerging as a financial center of the Asian continent is Tokyo.
Strengths of London include:
1. The concentration of
business and service functions - among them support services such as legal
services, accountancy, and management consultancy.
2. Efficient world-wide
communication links.
3. A favorable position in
the time zone between the United States and Far East.
4. A stable political
climate.
5. World-class service
industries including hotels, restaurants, theaters and other cultural
attractions.
Britain and the City of
London as a financial symbol, encouraged international liberalization in
financial services. It played a major role in negotiating agreements closely
connected with GATT (General Agreement of Tariffs and Trade) as well as negotiations within the
Organization for Economic Cooperation and Development. Briefly, apart from
world-wide insuarence and banking strength, Britain’s important features
include:
·
Its
foreign exchange market,. whose daily turnover of 294 Mln pounds in 1995
represented 30% of Global turnover and was more than the turnover of New York
and Tokyo combined.
·
The
London Stock Exchange which is the biggest trade center for overseas equities
in the world; it makes 55% of global turnover.
·
The
world’s second largest fund management center, after Tokyo.
·
One of
the world’s biggest markets in financial futures and options.
·
One of three
largest international bond centers in the world.
Britain’s international
role in the world monetary and financial fields became particularly in the late
1980s.
Deregulation has been the
main catalyst in increasing the City’s role as an international financial
center. Fundamental reforms of 1986, known as Big Bang affected the London
Stock Exchange tremendously, because any foreign financial institution can now
participate in the London money market. “What we were trying to do”, in the
words of a former Deputy Chairman of London Stock Exchange, “ was to create a
new market, not one just oriented toward the UK, but one that can become
international”. It was intended to secure London as the leading financial
center of Europe, and the third in the world alongside New York and Tokyo.
Many foreign banks and
finance houses tried to profit from the deregulation, some by direct
competition and others by buying long-established City enterprises. Before the
Big Bang all City stockbroking firms were British. By 1990 one hundred fifty
four out of four hundred and eight were foreign owned. The main investors in
British stockbroking are the United States, Japan and France (also see Chapter
2, The Stock Exchange).
British banks, insurance
companies, building societies, and other money lenders often prefer to invest
in other areas, rather than industry, in contrast with Britain’s competitors,
for example Germany and Japan, where the level of industrial development is
higher.
Britain strongly supports
the removal of national regulations and exchange controls which restrict the
creation of common market in financial services. London is a major center for
international banking. Altogether five hundred sixty one foreign banks are
represented in Britain. They employ about 40.000 people and provide different
services in many parts of the world.
Japan and the United
States are the two countries with most banks represented in London (see the
table attached). Assets/liabilities of overseas banks in Britain have doubled
in the last ten years. Overseas banks have a very high proportion of their operations
in foreign currency.
Since the end of 1920s the
Moscow Narodny Bank has been operating in London to deal with transactions with
the Soviet Union and Russia now.
A number of British banks
have their head offices in Britain but operate mainly abroad. Standard
Chartered is the major bank in this sector: it has a network of over 600
offices in more than 40 countries and employs over 25.000 people. Standard
Chartered’s activities are concentrated in Asia, Africa and Middle East.
British banks are
developing innovative banking services in their overseas operations. For
example Standard Chartered has opened the first fully automated branches in
Hong Kong and Singapore. Satellite dishes have been installed in Barclays’
branches in Zimbabwe
London and Tokyo are the
main world centers for eurocurrency dealings. The euromarket began with
eurodollars - US Dollars lent outside the United States - and now has developed into a powerful market of currencies
lent outside their domestic marketplace. Transactions can be carried out in
eurodollars, eurodeutschmarks, euroyen, and so on. So, euroloans are short-term
trances (three to six months) given by banks at the LIBOR rates. Eurobonds are
issued for periods of five to twenty years in currencies other than that of the
issuing country.
The London International
Futures Exchange trades on the floor of the Royal Exchange building. Over 200
banks and other financial institutions, both British and foreign, are members
of the market. In fact over 70% are overseas-owned. They make contracts in
British, German, Italian, and Japanese Government bonds.
In 1995 LIFFE announced
new linking agreements with the Tokyo International Financial Futures Exchange
and Chicago Board of Trade. In 1996 LIFFE merged with the London Commodity
Exchange, which is Europe’s primary market for trading futures and options
contracts in cocoa, coffee, sugar, wheat, potatoes.
Anyone may deal in gold
but, in practice, dealings are largely concentrated in the hands of five
members of the London gold market. Around 60 banks and often financial
companies participate in the London gold and silver markets. Trading is done by
telephone and electronic communications links. The five members of the London
Bullion Market Association meet twice daily to establish a London fixing price
for Gold and this price is a reference for world-wide gold dealings.
Chapter
5.
Recent Financial
Institutions (the London Club, Britain in the IMF, British Banks in Russia).
The International Monetary
Fund (IMF) and the London Club can not be properly described as recent
institutions but it is important to note their recent activities in the light
of the financial problems in Russia.
The IMF was founded in
1944 to secure international monetary cooperation and stabilize exchange rates.
Operating funds are subscribed by member Governments according to the volume of
their international trade, their national income and their international
reserve holdings. Members with temporary difficulties in their international
balances of payments may purchase or get credits form the IMF of the foreign
exchange they need at fixed rates if they meet the required conditions. Russia
applied to the IMF for credits.
Great Britain plays an
important role in the IMF. On the 10th of September 1999 the Сhancellor of the Exchequer Gordon
Brown was appointed to the Interim Committee of the IMF. The Committee was
established in 1974 to advise the IMF on the management of the international
monetary system as well as on dealing with any sudden shock to the world money
system. The Chancellor will lead discussions on the reform of the Interim
Committee after the proposals of the G7 Finance Ministers.
There will be also
discussions on reforms to involve the private sector in presenting the world
financial prices. It is the aim of IMF to relieve third world debt to avoid
large-scale financial crises.
Among the recent
developments it is important to mention the choice of London as the location of
NASDAQ-Europe. In his speech on the 5th of November 1999, the
Chancellor of the Exchequer Gordon Brown it was excellent news for the City of
London to launch a joint venture to create a pan-European security market.
Gordon Brown said:
”NASDAQ’s decision to locate its European exchange here represents a massive
vote of confidence in the City. NASDAQ - Europe will strengthen the UK
financial services industry and reinforce London’s position as one of the
worlds’ top international financial centers”. Mr. Brown added, “NASDAQ’s
presence here will be good for the wider economy too, not just in the UK but
Europe as a whole. Job creation and economic growth depend on efficient capital
markets sending funds to businesses to finance their expansion”.
An important move in the
European monetary life was the introduction of a single European currency, the
Euro, on the 1st of January 1999. A separate protocol recognizes
that Britain is not obliged to join the currency without a separate decision by
British Government and Parliament.
So far the Bank of England
has not voted to adopt the single currency. On the 6th of September
1999 Mr. Cook , the Foreign Secretary, stated that if the Euro proves to be a
success, it would be in Britain’s interest to join it. Britain will first have
to test whether there is enough flexibility in British economy and if the Euro
will promote strong international investment and boost British financial
services industry.
According to the decision
of European Union (EU) Heads of Government single currency notes and coins will
be introduced at the beginning of 2002 at latest.
The London Club set up in
the 1980s under an agreement in London, comprises over 600 big commercial banks
whose credits are not covered by government guarantees or insurance. There is a
steering committee of the Club which operates between the Club’s sessions. The
Sessions are held at the request of the debtors in different cities of the
world.
After the collapse of the
USSR, the Soviet Union bank for Foreign Economic Affairs owed the London Club a
total of over 32 Bln Dollars. Under the latest decision on restructuring the
Russian debt it was agreed in February 2000 that the debt would be restructured.
Nearly one third of the total amount will be written of and Russia will be
allowed to have a grace period of seven years, during which it will pay only
reduced interest rates on the remaining sum. In return, the Russian Government
undertakes the responsibility for the debt and would be considered defaulting
if it fails to meet the stated conditions.
Although the London Club
is not entirely a British entity the title speaks for the significance of the
city of London.
The world-wide network of
British banks is not directly represented on Russian market. Operations
available are carried out only through the branches of British banks based in
other cities of the world.
Conclusions.
1. Although historically the
heart of the financial services sector in Britain was located in the “Square
Mile” of the City of London, and this is broadly the case now, financial
institutions have moved outside the area all over the country.
2. The City of London is
concentration of British financial power which makes London an angle of the New
York-Tokyo-London triangular.
3. Though Great Britain is
still a leading industrialized nation and a member of G7 group it real power
and international influence centers around its financial activities.
Reference list.
1.David McDowall, Britain in
close-up/Longman Singapore Publishers Pte Ltd.
2.Britain’s Banking and Financial
Institutions/Reference Services, Central Office of Information, London.
3.
Angela Fiddles, The City
of London (the historic square mile).
4.
Talking Points on
Britain’s Economy/October 1999, December 1999.
5.
Банковское дело, выпуск №12, 1998г.
Appendix
:
Table
1 .
Net
Overseas Earnings of Britain’s
Financial Institutions
Million Pounds
Dealers
Market Brokers
Institutions
Funds
trusts
Trusts
Managers
Exchange
Register of Shipping
Leasing
institutions
Table 2.
Notes in circulation.
Value of notes in circulation end February
1996 (million)
No of notes issued by denomination in year to
end February1996 (million)
1 pound
5 pounds
10 pounds
20 pounds
50 pounds
Other notes
Total
Source : Bank of England.
Table 3.
Major British Banks
1995.
Assets Liabilities (Mln pounds)
Market Capital
(Mln pounds)
Staff
Branches
Cash dispensers and ATMs
National
of Scotland
TSB
National
Westminster
Bank of Scotland
Standard Chartered
Figure 1.
Major Banks lending
to British Residents December 1995.
Table 4.
Largest
Building Societies.
Rank by Group Assets
Rank After
Flotations and Mergers in 1977
Group Assets (million pounds)
Table 5.
Overseas Banks in
Britain
(Main Countries
Represented).
Country of origin
Branches of an Overseas Bank
British Incorporated Subsidiary of an Overseas
Bank
Representative offices
Other
Total
France
Germany
Italy
Japan
Switzerland
United States
Other countries
Total
Source: Bank of
England.
Table 6.
General and Long-term
Insurance Business 1985 - 1995.
General Insurance net
premiums.
Table
7.
Growth
in Unit Trusts and Investment Trusts.
Definitions.
Assets -
individual, company, legal body or government which has a cash value.
Big Bang -
to the London Stock Exchange in 1986.
Bill of Exchange -
of the bill, the stated at the fixed time.
Bond -
for a loan usually longer than 12 months; it indicates the interest rate and
the date of repayment.
Eurobond-
for a long-term loan (from 5 to 15 years) in any European currency but not in
the currency of the issuing bank.
Securities-
Exchange-
securities.
Stock Exchange-
securities .
Commodity Exchange-
preferably commodities and raw materials
Money Market-
validity of less than one year.
Factoring-
the responsibility for collecting the debts of another company.
Fund Management-
advising investors on how to invest their funds.
Financial Futures-
financial products on a specified future date, at the price agreed in the
present.
Option-
instruments or goods for a stated period at a stated price.
The London Bullion Market -
where trade is done by a telephone or electronic links.
Hedge
substitute for a transaction to be made at a later date
Open-Ended Fund-
Quite-edged loans -
spending.