he cityof London and its role as a financial center
Chapter 1.
Introduction. The Conceptof the City of London.
Britain is a majorfinancial centre providing a wide range of specialised services. The country’seconomy has for a long time been directed through the great financialinstitutions which together are known as “The City”, capital “C”, and whichare mainly located in the famous “Square Mile” of the City of London.
The “Square Mile” in theRoman Times historically emerged on the Thames as the business and industrialnucleus of the future London. Through centuries of business and religiousdevelopments the City assumed its role of the world commercial centre as it isknown today. When in the 20th century Great Britain lost itsempire and other financial centres got established in the world, the cityadapted 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), theworld’ s biggest insurance market (with about 1/5 of the international market), a Stock Exchange with a larger listing of securities than any otherexchange, and it remains the principal international centre for transactionsin a large number of commodities. A large proportion of Britain’s wealth hasbeen invested by the City overseas. The City’s annual foreign income roughlydouble that of the British manufacturing industries. The above proves theCity’s world significance as a financial centre. Geographically the City is alarge office area bubbling with life at daytime and comfortably quiet outsidethe office hours. It’s historical sights like the Tower of London, St Paul’sCathedral, the Museum of London, the Monument and others as well as thebeautifully impressive architecture of the office buildings attract crowds ofvisitors. The only housing project, the Barbican, provides very expensiveaccommodation along with an arts centre, a school and some official premises.
Since after the mid — 80sfinancial and related services have started to expand outside the “Square Mile”though the City of London remains the symbol and actual reality of thecountry’s power.
Ch a p t e r 2
Britain’s Economic andFinancial Position Today at Home and Abroad.
Finance and industry ofthe British economy go hand in hand as industry requires a diversified networkof financial institutions to develop successfully. Although Britain’sfinancial power today exceeds that of the country’s industrial achievement,the country was for years “the workshop of the world”. It still remains ahighly industrialised country but the end of the 20th century sawtendencies for the economic decline.
Historically, after twoworld wars and the loss of its empire Britain found it increasingly difficultto maintain its leading position in Europe. The growing competition from theUnited States and later Japan aggravated the country’s position.
Britain struggled to finda balance between the governments intervention in the economy and almostcompletely free-market economy of the United States. The theories ofthe great British pre-war economist J. M. Keynes stated that capitalist societycould only survive if the government controlled, managed and even planned muchof its economy. These ideas failed to get Britain out of the image of acountry with quiet market towns linked by steam trains puffing slowly throughgreen meadows. Arrival of Margaret Thatcher, the Conservative prime-ministerin office between 1979 and 1990, discarded these theories as completely wrong.Mrs. Thatcher claimed that all controls and regulations of the economy shouldbe removed and a market economy should recover. Her targets were nationalisedindustries. She refused to assist the struggling enterprises of the coal andsteal industries which were slimmed down in order to improve their efficiency.In the steel industry, for example, the workspace was reduced from 130000people to 50000 by 1990s and the production of 1 ton of steel by 1990 tookonly 3,7 man hours instead of 12 man hours in 1980. The government believedthat privatisation would increase efficiency and economic freedom wouldencourage private initiative. A lot of big publicly owned production and servicecompanies such as British Telecommunications, British Gas, British Airways,Rolls Royce and even British regional Water Authorities were sold into privatehands. Britain began to turn into a country of shareholders. Between 1979 and1992 the proportion of the population owning shares increased from 7 % to 24%.
The Conservativegovernment reduced the income tax from 33% to 25% as an incentive inproduction. This did not lead to any loss of revenue, since at the lower ratesfewer people tried to avoid tax. At the same time the government doubled theVAT on goods and services to 15%. Today it is 17%.
Small business began toincrease rapidly. In 1984 for example there was a total of 1.4 million smallbusiness though including “the black economy” the figure was nearer tomillion. Proportionately, however, there were 50% more of them in West Germanyand the United States and about twice more in France and Japan.
Many small businesses failto survive mainly as a result of poor management and also because compared withother European Community Britain offers the least encouraging conditions. Butsmall businesses are important because they can grow into big ones and becausethey provide over half of the new jobs. It is particularly important becauseunemployment in Great Britain rose to nearly 2.5 million people and a lot ofjobs are part-time.
Energy is a majorcomponent 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 remainsthe single most important source of energy, in spite of its relative decline asan industry, so oil and coal each account for about one third of total energyconsumption in Britain. Over a number of years British policy makers promotedthe idea of energy coming of different sources. One of them was nuclear energyas a clean and safe solution to energy needs. In fact Britain constructed theworld’s first large scale nuclear plant in 1956. However, there were a lot ofpublic worries after the US disaster at Three Miles Island and the Sovietdisaster in Chernobyl. Also nuclear research and safe technology is proved tobe very expensive — by 1990 the real commercial cost of nuclear plant was twiceas high that of a coal power station. Renewable energy sources such as wind orsolar energy, are planned to provide 1% of the national energy requirements inthe 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 spendingmore than 5% of their annual revenue on R & D compared with only 28% ofBritish companies. As a result Britain has been automating more slowly than herrivals. In fact it may be the consequence of Margaret Thatcher’s views onpublic spending which includes medical service, social spending, education andR&D. “The Iron lady” argued that “if our objective is to have a prosperousand expanding economy, we must recognise that high public spending kills growthof industry”, as money is taken from the productive sector (industry) to betransferred to unproductive part of it. As a result in the 80’s only 6% ofBritain’s labour had a university degree against 18% in America, 13% in Japanand 10% in Germany. Technical education has always been compared with Britain’smajor competitors. According to government study “ mechanical engineering islow and production engineers are regarded as the Cinderella of the profession”.Very few school leavers received vocational training. Since 1980’s amonguniversity graduates the tendency has been to go from the civil service tomerchant banking, rather than industry. And according to analysts resulted fromthe long-standing cultural roots. Public school leavers considered themselves“gentlemen” too long to adjust fast to the changes of time. Efforts are nowtaken by the labour government to boost technical and enterprise skills inschools. The 1999 Pre-budget report outlined a 10 million pounds for thepurpose.
Despite the favourableeffect of “Thatcherism” Britain’s economic problems in the 1990s seemed to bedifficult. Manufacturing was more efficient but Britain’s balance of paymentswas unhealthy, imports of manufacturing goods rose by 40%, and Britishexportscould hardly compete withthose of its competitors.Car workers in Germany, for instance, could produce a Ford Escort in help thetime taken in Britain. In the 90’s amongthe European countriesBritish average annual productivity per worker took the 6th place.The revenue softened the social problems but distracted Britain from investingmore into industry. Many analysts thought that much more should have beeninvested into engineering production, managerial and marketingbeforethe North Sea oil declined.
The Labour governmentundertakes to improve the situation. In his Pre-budget report on 9 November1999 the Chancellor of the Exchequer Gordon Brown set out new economicambitions for the next decade. Under themBritain will raise itsproductivity faster than its competitors to close the productivity gap and amajority of Britain’s school and college leavers will go on to highereducation.
In the 80s Britishcompanies invested heavily abroad while foreign investments in Britainincreased too. Today in aspeech in Tokyo on 6September1999 the Foreign Secretary Robin Cook said that “Britain is a chosencountry for more investment from Japan than anywhere else in Europe and morethan thousand companies operate in the U. K.”
Mr. Cook added that thehuge European Market of 370 million people was “the largest single market inthe world, a market that is set to expand even further with the arrival of newmember states”. In fact he said investment in Britain is the highest bridgeinto Europe.
Britain as a world leaderin “high-tech” industries
One of the three Britishmicroprocessor producers was making 70% of British silicon wafers required fornew information technology even in the seventies. On Nov.3.1999 Techmark, a newtechnology market, was launched at the London Stock Exchange. According toGordon Brown, Chancellor of the Exchequer, Techmark will be the London StockExchange “market within a market” for innovative technological companies.
The specialised institutions areagencies createdto meet the needs of specificgroups of borrowers mostly industrial and commercial — which are not adequatelycovered by other institutions. They operate in both public and private sectors.In general they offer alternative funding to that provided by banks andbuilding societies. Some of them were set up with Government support and withfinancial backing from banks and other financial institutions. Some publicsector agencies offer financial support to industry in Scotland, Wales, andNorthern Ireland.
The main private sectorinstitutions are finance houses and leasing companies, factoring companies,finance corporations and Venture Capital Companies.
Finance houses are major suppliers ofhire-purchase finance for the personal sector of short term credit and leasingto the corporate sector.
Leasing companies buy and own equipmentrequired and chosen by businesses and lease it at an agreed rental rate.
Factoring companies provide cash for acompany in exchange for the sums they owe. A factoring company buys up aclient’s invoices as they arise and finances up to 80% of the value of theinvoices; the rest is paid after a period, after deduction of administrationand finance charges.
Finance corporations meet the need for mediumand long term capital when such funds are not easily or directly available fromtraditional sources such as the Stock Exchange or banks.
Venture Capital Companies offer medium term andlong term equity financing for new and developing businesses when such fundsare not readily available from banks and other traditional sources. The BritishVenture Capital Association has 103 full members, which make up over 99% of theindustry.
Financial markets is a collection ofsophisticated securities, futures and options the money market, the eurocurrency market, Lloyd’s insurance market, the foreign exchange market andmarkets in bullion and commodities.
The Stock Exchange
The origin of the LondonStock Exchange goes back to the coffee houses of the seventeenth century wherethose who wished to invest or raise money bought and sold shares in joint stockcompanies. Brokers later opened their own subscription Economy of the country has beendirected 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 ofBritain’s wealth has been invested by the City overseas. A number of bankinginstitutions have their head offices in Britain but operate mainly abroad inparticular regions such as Latin America or East Asia through extensive branchnetworks. The major bank in this sector is Standard Chartered. This shows howthe City of London expands its activities beyond the country’s borders; thesame goes for the influence of the London Stock Exchange and CommoditiesExchanges (particulars of the City of London as a financial center will bedealt with in Chapter three).
Chapter3.
The City of London as aFinancial Center, its Main Institutions.
There has been a long tradition inBritain 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 ofLondon. This remains broadly the case today, though the markets for financialand related services have grown and diversified greatly.
Banks, insurancecompanies, the Stock Exchange, money markets, commodity shipping and freightmarkets and other kinds of financial institutions are concentrated in thesolemn buildings of the City and beyond its borders. The City of London is thelargest financial center in Europe. London is also the world’s largestinternational insurance market and has the biggest foreign exchange market.
Britain’s financialservice industry gives about 6.5 % of its gross domestic products (GDP) andcontributes some 35 thousand million pounds a year. The largest contributorsare banks, insurance, institutions pension funds, and securities dealers. Tohelp Britain’s financial services to respond to the competition and at the sametime to protect the public investment, the Government introduced 3 pieces oflegislation to supervise financing the industry: the Financial Services Act(1986), the Building Societies Act (1986) and the Banking Act (1987). Underthese acts investment businesses need to be authorized and they have to obeyrules set in the legislation. The main responsibility to supervise were theBank of England, the Building Societies Commission, the Treasury and theDepartment of Trade and Industry. The Serious Fraud office was set up toinvestigate and prosecute significant and complex fraud.
The Bank of England.
The Bank of England wasestablished 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 ofEngland Act in 1946. It is the heart of the City of London and Britain’scentral bank. The Bank’s main functions are to execute monetary policy, to actas banker to the Government, to issue banknote and to provide central Bankingfacilities
for the banking systemthat 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 Governmentin achieving low inflation. Unlike some other central banks the Bank can notact independently of the Government. Decisions on changes in the interest ratesare taken by the Chancellor of Exchequer. The Bank’s role is to advise theChancellor and to carry out his decisions. The 1999 (November) interest ratewas 5.5%.
As banker to theGovernment 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 isno longer backed by gold but the Government and other securities. The Scottishand Northern Ireland Banks have limited rights to issue notes and those must befully covered by holdings of the Bank of England notes. Coins can be providedby the Royal Mint.
The Bank of England caninfluence money market conditions through discount houses. If on any day thereis a shortage of cash in Banking system, the bank relieves the shortage eitherby buying bills from the discount houses or lending directly to them.
The Bank of England isresponsible for supervision of the main wholesale markets in London for money,foreign exchange or gold bullion.
On behalf of the Treasurythe Bank manages the Exchange Equalization Account (EEA). Using the resourcesof EEA the Bank may intervene in the foreign exchange markets to check unduefluctuations in the exchange rate of sterling.
Discount Houses.
The Discount Houses areunique to the City of London (and to Britain as a country). They occupy thecentral position in the British monetary system. They act as intermediariesbetween the Bank of England and the rest of the banking sector promoting anorderly flow of funds between the Government and the banks. In return foracting as intermediaries the discount houses have privileged daily access tothe Bank of England as “lender of last resort”.
Banks.
Banks in Britain developedfrom the London gold miths of the 17th century. By the 1920s and the1930s there were five large clearing banks with a network across the country.In February 1996 there were 539 institutions authorized under the Banking. Actof 1987. In Britishbanking retail banks should be described as dominant.
Retail banks primarily serve personalcustomers and small to medium-sized businesses. They operate through more than 11.350 branchers offeringcash deposits withdrawl facilities and systems for transferring funds. Theyprovide current accounts, deposit accounts various types of loan arrangementsand a growing range of financial services.
The main banks in England and Wales areBarklays, Lloyds, Midland, National Westminter and the TSB group. The majorScottish banks are the Bank of Scotland, Clydesdale and Royal Bank of Scotland.
With a relaxation ofrestrictions on competition among financial institutions major banks havediversified the services they provide. They have lent more money for housepurchases, have more interests in leasing and factoring companies, merchantbanks, securities dealers, insurance and trust companies. They provide lowfacilities to industrial companies ands now support a loan guarantee schemeunder which 70% of the value of loans to small companies is guaranteed by theGovernment.
Plastic card technologyhas revolutionized cash transfer and payments systems. There are around ninetytwo million plastic cards in circulation in Britain. There are different typesof cards but they often combine functions. Cards can be used overseas too toobtain cash from bank ATM ( Automated Teller Machines). Cash machine cards havegreatly improved customers’ access to cash. All retail banks and buildingsocieties participate in nation wide networks of ATMs. About two thirds of cashnow is obtained through Britain’s twenty one thousand ATMs. .A lot of them arelocated different places at supermarkets, for instance.
Many banks offerelectronic payment of cheques, telephone banking, under which customers use atelephone to obtain account information, make transfers or pay bills. Otherinnovations include computer-based banking (through home computer) servicesover Internet and video links.
Merchant banks.
The traditional role ofmerchant banks was to accept bills of exchange, to provide funds for trade andalso to raise capital to British companies through the issue of bonds and othersecurities. These activities continue, but the role of Britain’s merchant bankshas diversified enormously in recent years. Although they are called “banks”they are more involved in providing a range of professional services, such ascorporate finance and investment management, than in lending money.
Building societies.
Building societies aremutual institutions owned by their savers and borrowers. They havetraditionally concentrated on housing finance, long-term mortgage loans againstproperty — most usually houses purchased for occupation. Services have beenextended into other areas, including banking, investment services andinsurance. The Societies are one of the main places were people deposit theirsavings — around 60% of adults have a building society saving accounts.Building societies offer a variety of accounts with interest rates related tothe time for which a saver is prepared to tie up his money. So they are majorlenders for house purchases. Four of the largest Societies are planning tobecome banks. The largest Societies, the Halifax, Abbey National and Nationwideowe 45% of the total assets of the movement.
National Savings Bank.
The National Savings Bankis run by the department of National Savings. It provides a system ofdepositing and withdrawing savings at twenty thousand post offices around thecountry or by post. The National Savings Bank does not offer lendingfacilities. Its deposits are used to finance the Governments public sectorneeds.
Investing Institutions.
The investing institutionsare those which collect savings and invest them into securities market andother long-term assets. The main investment institutions are insurancecompanies, pension funds, unit trusts and investment trusts. Together they makea vast resource of funds which are invested in securities and other assets. They own around 58% of British shares. The British insurance industry is highlysophisticated and serves millions of policyholders in Britain and overseas.Policyholders include governments, companies and individuals. The Britishinsurance is the forth largest in the world and in proportion to its GDP is thehighest in any country. There are 2 broad categories of insurance: long-terminsurance for many years, such as life insurance, permanent health (medical)insurance; and general insurance for a year or less, which covers risks ofdamage, such as loss of property, accidents and short-term health insurance. In1995 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 areemployed in activities related to insurance.
Lloyd’s is an incorporatedsociety of private insurers in London. Originally it dealt with marineinsurance. Today it deals with other classes of insurance, today it deals withother classes of insurance. Long-term life and financial guarantee business isnot covered. Insurance brokers as intermediaries are a valuable part of theinsurance market. Lloyd’s insurance brokers play an important role in theLloyd’s market.
Institute of LondonUnderwriters 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 Instituteissues combined policies in its own name on risks which are underwritten bymember companies. About half of the 58 member companies are branches orsubsidiaries of overseas companies.
Pension Funds.
Pension Funds collectsavings Pension Funds collect savings from occupational pension schemes andpersonal pension schemes. Pension contributions are invested throughintermediaries in securities and other investment markets. Pension fund have abecome a major force in securities markets because they hold about 28% of the securities listed on the London Stock Exchange. Total Pension fund assets arevery big. To protect them the Pensions Act was introduced in 1995 to increaseconfidence in the security of the funds.
Investment trusts and unittrusts.
Both investment trusts andunit trusts offer investors the opportunity to benefit from pools investments,although their respective structures are somewhat different. Assets have grownconsiderably in the last few years. So individuals are attracted by thepossibility to invest rather small amounts either on a regular basis, usuallymonthly, or in a lump sum.
Investment trustscompanies are companies which are listed on the London Stock Exchange and mustinvest mostly in securities for the benefit of their shareholders. The trustsare exempt from tax on money which they get within the trusts. Some trusts specializein particular geographical areas or in particular markets. At the end of June1996 there were about 350 investment trusts companies listed on the LondonStock Exchange.
In unit trusts theinvestors’ fund are pooled together but are divided into units of equal size.Unit trusts are open ended collective funds where the funds are managed bymanagement 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 LondonStock Exchange goes back to the coffee houses of the 17th century,where those who those who wished to invest or raise money bought and soldshares of joint-stock companies. Brokers later opened their own subscriptionrooms and in 1773 this was named the Stock Exchange. During the 19th century the Stock Exchange developed as the demand for capitol grew withBritain’s Industrial Revolution. The Exchange also financed the construction ofrailways, bridges and dams across the world. Today it is one of a number ofhighly organized financial markets of the City. It provides trading platformand the means of raising capital for British and foreign companies, Governmentsecurities, eurobonds and depository receipts. Official list is the Exchangesmain market, while AIM, the Exchanges new market is for smaller rapidlygrowing companies. It opened in 1995. Companies which apply for a listing onthe Exchange must provide a full picture of their operations, i9ncluding theirfinancial record, management and business prospects. If a company wants to joinAIM the rules are less strict. Such companies include multimedia and hightechnology business.
Today the Exchange hasmoved away from face-to-face dealing on the trading floor to system of dealingfrom 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 toparticipate in the London money market. Other changes involved a system underwhich negotiated commissions were allowed instead of fixed rates and dealersare permitted to trade in securities both as principals and as agents.Traditional retail stockbrokers are facing growing competition from operationsrunning by large banks and building societies.
The Exchange has itsadministrative center in London, with regional offices in Belfast, Birmingham,Glasgow, Leads and Manchester.
Many companies raise newcapital on the London money market. The quiet-edged market, that is the marketof Government shares, allows the Government to raise money by issuing stockthrough the Bank of England.
The Exchanges now goingthrough a further period of change which has been described as the mostsignificant period since “The Big Bang”.
Money markets.
London’s money marketschannel wholesale short-term funds between lenders and borrows. Theseoperations are conducted by all the major banks and financial institutions. TheBank of England regulates the market. There is no physical market place;negotiations are conducted mostly by telephone or through automated dealingsystems. The main financial instruments are CDs (Certificates of Deposit),bills of exchange, Treasury and local authority bills and short-term Governmentstocks.
Financial Futures andTraded Options.
Financial futures are legal contracts forthe purchase or the sale of financial products, on a specified future date ata price agreed in the present. Trading and financial futures developed out ofthe numerous futures markets in commodities which originate from London’sposition as a port and from Britain’s need to import food and raw material.
Options are contracts which givethe right to buy or sell financial instruments or physical commodities for astated period at a predetermined price.
Financial futures andoptions are traded on the London International Futures and Option Exchange(LIFFE) which was established in 1982…
Commodity Exchanges
Britain remains theprincipal international center for transactions in a large number ofcommodities, though the consignments themselves never pass through the ports ofBritain. The need for close links with sources of finance, shipping andinsurance services often determines the locations of these markets in the Cityof London. There are futures markets in cocoa, coffee, grains, rubber, sugar,pigmeat, potatoes there.
Gas, oil for heating andpetroleum are traded through the International Petroleum Exchange, Europe’sonly energy futures exchange.
Copper, lead, zinc,nickel, aluminum, aluminum alloys and tin are treaded through the London MetalExchange (LME), the world’s largest non-ferrous base metals exchange.
The Baltic Exchange is theworld’s leading international shipping exchange. It contributed to 292 Mlnpounds 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 ofoil, ore, coal and grain. All Britain’s agricultural futures markets areoperated from the Baltic Exchange and physical trading and commodities is alsocarried out there.
Chapter4.
The International Role ofthe City of London in the World Monetary and Currency Fields.
A recent comprehensivestudy of four world cities — London, Paris, New York and Tokyo — confirmed manystrength of London and described it as possibly the most international of allworld cities. The study said that London and New York are the only two pre-eminentinternational financial centers with advantages over other cities. One citythat is emerging as a financial center of the Asian continent is Tokyo.
Strengths of London include:
1. The concentration ofbusiness and service functions — among them support services such as legalservices, accountancy, and management consultancy.
2. Efficient world-widecommunication links.
3. A favorable position inthe time zone between the United States and Far East.
4. A stable politicalclimate.
5. World-class serviceindustries including hotels, restaurants, theaters and other culturalattractions.
Britain and the City ofLondon as a financial symbol, encouraged international liberalization infinancial services. It played a major role in negotiating agreements closelyconnected with GATT (General Agreement of Tariffs and Trade) as well as negotiations within theOrganization for Economic Cooperation and Development. Briefly, apart from world-wide insuarence and banking strength, Britain’s important featuresinclude:
· Itsforeign exchange market,. whose daily turnover of 294 Mln pounds in 1995represented 30% of Global turnover and was more than the turnover of New Yorkand Tokyo combined.
· TheLondon Stock Exchange which is the biggest trade center for overseas equitiesin the world; it makes 55% of global turnover.
· Theworld’s second largest fund management center, after Tokyo.
· One ofthe world’s biggest markets in financial futures and options.
· One of threelargest international bond centers in the world.
Britain’s internationalrole in the world monetary and financial fields became particularly in the late1980s.
Deregulation has been themain catalyst in increasing the City’s role as an international financialcenter. Fundamental reforms of 1986, known as Big Bang affected the LondonStock Exchange tremendously, because any foreign financial institution can nowparticipate in the London money market. “What we were trying to do”, in thewords of a former Deputy Chairman of London Stock Exchange, “ was to create anew market, not one just oriented toward the UK, but one that can becomeinternational”. It was intended to secure London as the leading financialcenter of Europe, and the third in the world alongside New York and Tokyo.
Many foreign banks andfinance houses tried to profit from the deregulation, some by directcompetition and others by buying long-established City enterprises. Before theBig Bang all City stockbroking firms were British. By 1990 one hundred fiftyfour out of four hundred and eight were foreign owned. The main investors inBritish stockbroking are the United States, Japan and France (also see Chapter2, The Stock Exchange).
British banks, insurancecompanies, building societies, and other money lenders often prefer to investin other areas, rather than industry, in contrast with Britain’s competitors,for example Germany and Japan, where the level of industrial development ishigher.
Britain strongly supportsthe removal of national regulations and exchange controls which restrict thecreation of common market in financial services. London is a major center forinternational banking. Altogether five hundred sixty one foreign banks arerepresented in Britain. They employ about 40.000 people and provide differentservices in many parts of the world.
Japan and the UnitedStates are the two countries with most banks represented in London (see thetable attached). Assets/liabilities of overseas banks in Britain have doubledin the last ten years. Overseas banks have a very high proportion of their operationsin foreign currency.
Since the end of 1920s theMoscow Narodny Bank has been operating in London to deal with transactions withthe Soviet Union and Russia now.
A number of British bankshave their head offices in Britain but operate mainly abroad. StandardChartered is the major bank in this sector: it has a network of over 600offices in more than 40 countries and employs over 25.000 people. StandardChartered’s activities are concentrated in Asia, Africa and Middle East.
British banks aredeveloping innovative banking services in their overseas operations. Forexample Standard Chartered has opened the first fully automated branches inHong Kong and Singapore. Satellite dishes have been installed in Barclays’branches in Zimbabwe
London and Tokyo are themain world centers for eurocurrency dealings. The euromarket began witheurodollars — US Dollars lent outside the United States — and now has developed into a powerful market of currencieslent outside their domestic marketplace. Transactions can be carried out ineurodollars, eurodeutschmarks, euroyen, and so on. So, euroloans are short-termtrances (three to six months) given by banks at the LIBOR rates. Eurobonds areissued for periods of five to twenty years in currencies other than that of theissuing country.
The London InternationalFutures Exchange trades on the floor of the Royal Exchange building. Over 200banks and other financial institutions, both British and foreign, are membersof the market. In fact over 70% are overseas-owned. They make contracts inBritish, German, Italian, and Japanese Government bonds.
In 1995 LIFFE announcednew linking agreements with the Tokyo International Financial Futures Exchangeand Chicago Board of Trade. In 1996 LIFFE merged with the London CommodityExchange, which is Europe’s primary market for trading futures and optionscontracts in cocoa, coffee, sugar, wheat, potatoes.
Anyone may deal in goldbut, in practice, dealings are largely concentrated in the hands of fivemembers of the London gold market. Around 60 banks and often financialcompanies participate in the London gold and silver markets. Trading is done bytelephone and electronic communications links. The five members of the LondonBullion Market Association meet twice daily to establish a London fixing pricefor Gold and this price is a reference for world-wide gold dealings.
Chapter5.
Recent FinancialInstitutions (the London Club, Britain in the IMF, British Banks in Russia).
The International MonetaryFund (IMF) and the London Club can not be properly described as recentinstitutions but it is important to note their recent activities in the lightof the financial problems in Russia.
The IMF was founded in1944 to secure international monetary cooperation and stabilize exchange rates.Operating funds are subscribed by member Governments according to the volume oftheir international trade, their national income and their internationalreserve holdings. Members with temporary difficulties in their internationalbalances of payments may purchase or get credits form the IMF of the foreignexchange they need at fixed rates if they meet the required conditions. Russiaapplied to the IMF for credits.
Great Britain plays animportant role in the IMF. On the 10th of September 1999 the Сhancellor of the Exchequer GordonBrown was appointed to the Interim Committee of the IMF. The Committee wasestablished in 1974 to advise the IMF on the management of the internationalmonetary system as well as on dealing with any sudden shock to the world moneysystem. The Chancellor will lead discussions on the reform of the InterimCommittee after the proposals of the G7 Finance Ministers.
There will be alsodiscussions on reforms to involve the private sector in presenting the worldfinancial prices. It is the aim of IMF to relieve third world debt to avoidlarge-scale financial crises.
Among the recentdevelopments it is important to mention the choice of London as the location ofNASDAQ-Europe. In his speech on the 5th of November 1999, theChancellor of the Exchequer Gordon Brown it was excellent news for the City ofLondon 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 massivevote of confidence in the City. NASDAQ — Europe will strengthen the UKfinancial services industry and reinforce London’s position as one of theworlds’ top international financial centers”. Mr. Brown added, “NASDAQ’spresence here will be good for the wider economy too, not just in the UK butEurope as a whole. Job creation and economic growth depend on efficient capitalmarkets sending funds to businesses to finance their expansion”.
An important move in theEuropean monetary life was the introduction of a single European currency, theEuro, on the 1st of January 1999. A separate protocol recognizesthat Britain is not obliged to join the currency without a separate decision byBritish Government and Parliament.
So far the Bank of Englandhas not voted to adopt the single currency. On the 6th of September1999 Mr. Cook, the Foreign Secretary, stated that if the Euro proves to be asuccess, it would be in Britain’s interest to join it. Britain will first haveto test whether there is enough flexibility in British economy and if the Eurowill promote strong international investment and boost British financialservices industry.
According to the decisionof European Union (EU) Heads of Government single currency notes and coins willbe introduced at the beginning of 2002 at latest.
The London Club set up inthe 1980s under an agreement in London, comprises over 600 big commercial bankswhose credits are not covered by government guarantees or insurance. There is asteering committee of the Club which operates between the Club’s sessions. TheSessions are held at the request of the debtors in different cities of theworld.
After the collapse of theUSSR, the Soviet Union bank for Foreign Economic Affairs owed the London Club atotal of over 32 Bln Dollars. Under the latest decision on restructuring theRussian 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 beallowed to have a grace period of seven years, during which it will pay onlyreduced interest rates on the remaining sum. In return, the Russian Governmentundertakes the responsibility for the debt and would be considered defaultingif it fails to meet the stated conditions.
Although the London Clubis not entirely a British entity the title speaks for the significance of thecity of London.
The world-wide network ofBritish banks is not directly represented on Russian market. Operationsavailable are carried out only through the branches of British banks based inother cities of the world.
Conclusions.
1. Although historically theheart of the financial services sector in Britain was located in the “SquareMile” of the City of London, and this is broadly the case now, financialinstitutions have moved outside the area all over the country.
2. The City of London isconcentration of British financial power which makes London an angle of the NewYork-Tokyo-London triangular.
3. Though Great Britain isstill a leading industrialized nation and a member of G7 group it real powerand international influence centers around its financial activities.
Reference list.
1.David McDowall, Britain inclose-up/Longman Singapore Publishers Pte Ltd.
2.Britain’s Banking and FinancialInstitutions/Reference Services, Central Office of Information, London.
3. Angela Fiddles, The Cityof London (the historic square mile).
4. Talking Points onBritain’s Economy/October 1999, December 1999.
5. Банковское дело, выпуск №12, 1998г.
Appendix:
Table1 .
NetOverseas Earnings of Britain’sFinancial Institutions
Million Pounds Banks 6,188 Securities Dealers 1,658 Commodity traders. Bullion dealers and export houses. 556 Money Market Brokers 112 Insurance Institutions 5,952 Pension Funds 2,044 Unit trusts 724 Investment Trusts 383 Fund Managers 425 Baltic Exchange 292 Lloyd’s Register of Shipping 57 Finance Leasing 40 Non-specified institutions 1,962 Total 20,393
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 56 -
5 pounds 1,067 336
10 pounds 5,688 575
20 pounds 8,579 326
50 pounds 3,104 43
Other notes 1,154 -
Total 19,648 1,280
Source: Bank of England.
Table 3.
Major British Banks1995.
Assets Liabilities (Mln pounds)
Market Capital
(Mln pounds)
Staff
Branches
Cash dispensers and ATMs Abbey National 97,614 10,765 16,300 678 1,267 Bank of Scotland 34,104 4,095 11,300 411 463 Barclays 164,184 18,407 61,200 2,050 3,020 Lloyds TSB 131,750 25,496 66,400 2,858 4,346 Midland 92,093 39,658 43,400 1,701 2,282
National
Westminster 166,347 13,548 61,000 2,215 2,998 Royal Bank of Scotland 50,497 4,750 19,500 687 1,009
Standard Chartered 38,934 7,757 1,100 1 -
Figure 1.
Major Banks lendingto British Residents December 1995.
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Table 4.
LargestBuilding Societies.
Rank by Group Assets
Rank After Flotations and Mergers in 1977
Group Assets (million pounds) 1. Halifax. - 98,655 2. Nationwide. 1 35,742 3.Woolwich - 28,005 4. Alliance & Leicester - 22,846 5. Bradford & Bingley 2 15,658 6. Britannia 3 14,916 7.National & Provincial - 14,133 8.Northern Rock - 11,559 9.Bristrol & West - 8,589 10. Birmingham Mdshires 4 6,725 11. Yorkshire 5 6,412 12.Portman 6 3,513 13.Coventry 7 3,379 14.Skipton 8 3,037
Table 5.
Overseas Banks inBritain
(Main CountriesRepresented).
Country of origin
Branches of an Overseas Bank
British Incorporated Subsidiary of an Overseas Bank
Representative offices
Other
Total
France 16 8 23 - 47
Germany 19 5 4 - 28
Italy 15 1 28 - 44
Japan 28 6 15 4 53
Switzerland 9 2 17 - 28
United States 23 9 11 6 49
Other countries 153 41 111 7 312
Total 263 72 209 17 561
Source: Bank ofEngland.
Table 6.
General and Long-termInsurance Business 1985 — 1995.
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General Insurance netpremiums.
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Table7.
Growthin Unit Trusts and Investment Trusts.
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Definitions.
Assets — anything owned by an individual, company, legal body or government which has a cash value.
Big Bang - a system of major changes which brought deregulation to the London Stock Exchange in 1986.
Bill of Exchange - an officially signed promise to pay to the receiver of the bill, the stated at the fixed time.
Bond — a certificate issued by the borrower as a receipt for a loan usually longer than 12 months; it indicates the interest rate and the date of repayment.
Eurobond- an international certificate issued by the borrower for a long-term loan (from 5 to 15 years) in any European currency but not in the currency of the issuing bank.
Securities- general term for stocks and shares of all types.
Exchange- a market for the toll purchase of goods or securities.
Stock Exchange- a market for short or long term transactions in securities .
Commodity Exchange- a stable market for wholesale transactions in preferably commodities and raw materials
Money Market- a market for money instruments with a period of validity of less than one year.
Factoring- a business activity in which a company takes over the responsibility for collecting the debts of another company.
Fund Management- managing investors’ funds on their behalf or advising investors on how to invest their funds.
Financial Futures- legal contracts for the sale or purchase of financial products on a specified future date, at the price agreed in the present.
Option- A contract giving the right to buy or sell financial instruments or goods for a stated period at a stated price.
The London Bullion Market - The international gold and silver market in London where trade is done by a telephone or electronic links.
Hedge The purchase or sale futures contract as a temporary substitute for a transaction to be made at a later date
Open-Ended Fund- A fund without a fixed number of shares
Quite-edged loans - Loans issued on behalf of the Government to fund its spending.