The GEO Politics of the City Book Launch1

This is a book, or collection of essays which is covering perhaps some of the key issues that the City has to and continues to need to address. Although the credit crunch, or should I more accurately refer to it as the liquidity crunch, may well not have been envisaged at the time in which the contributors were constructing their chapters, nevertheless as this book addresses the question of what can and should be the future of the City of London from a political, economic, commercial, technological, ideological, security, ethical, and sustainable basis, then the fact that we are somewhere between the start and the finish of a turbulent financial times makes these points even more valid and how to address them particularly pertinent. Financial services, banking in fact the City conjures up both hoorays and boos. Its year on year sustainable increase in so many aspects of financial services has indeed brought great benefits to the UK in, at is simplest, tax and employment. But its lack of tangibility and the perception of the industry means that it can often be criticized simply for doing well.

However amongst the many things that have been thrown up as a consequence of the Northern Rock problem is that not only does that bank employ 6,000 people or so in a relatively small geographic area in the North East but that it underpins much more of that in respect of the local economy. This is just a small example of a general truth of the real role of the banking industry in the UK.

Our economy is heavily driven by financial services and as the Smallwood Report in 2006 showed, it was the largest sustainable growth area over a ten year period. As such, it provides directly and indirectly for four or maybe even more than 4million people from those actively working in financial services through to the shops that surround the main headquarters, the lawyers, the accounting firms, the sponsorship of some of the key events of the UK, football, Wimbledon, cricket, rugby, and then perhaps the two ends of the spectrum of estate agents on the one hand and charities on the other. Thus this industry centered in London brings support to a very significant number of individuals, economic activities and commercial enterprises.

As has been said in the forward by Peter Jay though, the greatest potential threat to the City is, as always, Westminster and Whitehall. Mortal damage can indeed be done by them if taxes and regulations create an environment in which the worlds animal spirits no longer wish to do business here in London. Westminster is, as I know personally from one of my many previous careers, is an environment that is swayed strongly by single issues sentiment, special interest lobbies, effective campaigns and emotional blackmail. When a problem arises, the imperative is on politicians to "do" when in reality they probably would be better to let it resolve itself.

In his contribution Stephen Barber rightly highlighted that unlike almost anywhere else, far from seeing China and to a less extent India as simply a threat, the City has come to view their growth as an opportunity. The London Stock Exchange is the most international of all bourses, over 2,000 have been admitted to the market, London has 40% share of the global foreign equity market, 70% of all Eurobonds, 43% of the counter derivatives and 32% of global foreign exchange turnover. These statistics are reinforced by David Lassels where he shows the key markets in which London has significantly outpaced the US.

Academic studies have stressed geography as being one of the good reasons why financial centers have developed New York, Zurich, Hong Kong and Tokyo served a well defined region but London was always an exception to the theory. It is true that we are a trading nation, whether it was potatoes and tobacco at the time of Drake, the jewels and spices with the East (P&O stands for Peninsular and Orient) and all for very good reasons. The Empire and the Commonwealth of later years all are examples of how an island race relatively small in geography extends its reach through doing business and internationally. Thus we are used to growing our economy by looking out, and that has probably worked to the Citys advantage by, again as David Lassels comments, forcing it to find markets elsewhere and to become more international.

Politics plays an important part in all this. The politics of, for example the French has always meant that they were closely tied to their financial centre, as indeed is the case in Germany with Frankfurt, in the UK we have tended to be hands off respecting the independence of the City.

But that hands off is starting to look much more hands on now than before. Any survey of financial institutions with any retail business whatsoever all highlight the increasing and aggressive nature of regulation. And whilst consumer protection is entirely correct, there is a clear requirement for wisdom, logic and judgment. The industry now holds a general view that although principle based regulation operates well in the wholesale sector, when it comes to retail the failure to properly define what are consumer responsibilities and what are industry responsibilities, coupled with the use of subjective language such as fair and unfair is leaving the industry open to retrospection, to differential interpretation of requirements and a regulatory environment which is neither secure nor sufficiently stable.

In the big institutions such as the banks, retail is connected to wholesale and thus if something does not work properly in one part of the business its impact and effect is felt right across.

Into this falls the Northern Rock which has shown up the UK in a less than good light. Inquiries are underway and a certain amount of, blame game is taking place. Some question whether or not we should have a tripartite or whether prudential supervision should revert to the Bank of England. Regulatory upheaval is not actually what the industry is seeking and putting prudential supervision back to the Bank of England leaving everything lese with the FSA doesnt look an attractive proposition. A brief examination of what happens in other countries shows quite clearly that when an issue relating to a problem with a bank occurs, then all the authorities the central bank, the regulator and the politicians - have an involvement. And not surprisingly so. Thus tripartite agreements either official or unofficial are present in many countries.

Nevertheless we are evidently heading for some changes in terms of deposit protection for depositors should a bank fail, even though the Northern Rock has not failed and we may well be heading for some form of a change to the framework to allow earlier intervention in the event of difficulties. And all these when some basic pieces of work still have not been done or not conveyed to the market. If, for example the FSA had taken action rather than a wait and see approach in May of this year, and if the Bank of England had operated its money market in times of difficulty more like that of the European Central Bank, it could be that the issues surrounding that bank could have been addressed in a much more orderly fashion. Without that piece of work both being done and discussed, it is premature in the extreme to rush to some new and different regime. I am well aware that all parts of the tripartite have a position to defend but that is of less important than an open, clear assessment of where the issues lie and what were the execution problems. Structural change may well not be required. I do not advocate some sort of royal commission which kicks things into the long grass for several years, but I do advocate an open, proper and honest inquiry and before any rush to change the law.

The UK is an Anglo Saxon economy which is now a commonly used expression for an open and competitive environment. That Anglo Saxon approach has attracted businesses and individuals from all over the world to come and work in London. Unfortunately I have forgotten which of the contributors to this book gave the wonderful example whereby an international bank called in three of their young high flyers and said to them two of you are going to be posted to London and one to Frankfurt. The two going to London were ecstatic, but the one for Frankfurt asked what was it that he had done wrong!

Welcoming people of all nationalities and with high skills is what the UK has done over many years. It causes issues, the immigration theme is a broad, deep and sensitive one, but not often targeted at the financial services industry. Except perhaps by some of our young people as I think we have to recognise that our education system means that often our 23, 24 and 25 year olds do not necessarily compare well from an educational perspective with those who come from overseas.

What our openness has not done is made our financial centre necessarily more prone to terrorism than others. As Richard Woodward points out despite the many terrorist attacks on financial centers in recent years, and a sense that they are likely future targets, a mass exodus of firms from the worlds financial conurbations is unlikely. However he goes on to say that today the City of London authorities are wrestling with the core dilemma of globalization, namely how to garner the benefits of opening borders and open societies whilst minimizing the risk associated with them. Many of us have found ourselves at some point or another in these last two years caught up indirectly with the consequences of the attacks that we have had here. We know not either just how many attacks have been avoided. And those attacks will continue as long as people feel a sense of injustice and that injustice is so often displayed by the disparity in personal financial circumstances and opportunities.

Globalization has brought many things. Manufacturing moving east and migration of people to the west. It has opened up knowledge of different societies and it also enables growth in that one area which is more borderless and seamless than just about any other and that is financial services. Financial markets can be used for the good and they can typify all that some see is wrong and unfair. Thus it is giving a positive purpose to those in other countries who currently do not have one that lies in the future security of London.

But let me conclude with things back closer to home and more tangible. And that is Europe. With something like 75% of all our legislation in the UK now emanating from Brussels and possibly more than that when it comes to financial markets, the European agenda and the European dimension cannot be ignored. Some think that because they operate only within one country that the European issues pass them by. That is not the case. It is not necessary to undertake cross border business to be caught up in changes as a consequence of greater harmonization across the EU.

The expectations of Commissioners are that they will be constantly addressing new barriers and bring about more harmonisation with new directives. And European politicians are not elected to the European Parliament not to do things. Thus the imperative from the Brussels authorities is for more change.

The great conundrum that remains as unresolved now as it ever was is that there are 20 or so EU countries who have a say yet only a handful who truly have a financial market. Thus the comprise to suit the many can impact adversely on the few who do the business. A second and longstanding division is between those who want to go for single points of power with everyone operating the same rules and those who believe that such a model gives too rigid a system, too much power into one set of hands, and will limit the competitiveness of the EU. As you may have guessed, the Brits fall into the latter category and the French into the former. We have not helped our case again because of the way we have handled the Northern Rock, but nevertheless that does not make the case any less valid.

I appreciate that tonight is about talking about this book, the GEO politics of the City, but the BBA has just produced a document on regulating a multi jurisdictional bank, and whilst I do not expect that to be considered the exciting book of the year or entered for any prize, nevertheless it does practically articulate what it is that a bank operating in a number of jurisdictions some of which are not within the EU does want out of his regulators. And what does it want? The answer is good caliber people, equivalent ways of operating, sharing of information, minimizing duplication, bringing down regulatory costs. These next few months will see whether we do go down that line or whether we do not.

Are threats to the City always naval gazing? No but we do need to look at what it is that we have got and how it is that we promote and sustain it. Financial markets can shift and there are lots of centers who want a slice of the UK action.