Video

#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 13 November 2015 at 13:03 GMT

Is London about to 'walk the plank'?

Head of Editorial Content / Saxo Bank
Denmark
  • BBA report says UK needs to take 'urgent measures' to save the City of London
  • London's status as a financial capital largely fueled by deregulation, EU access
  • Measures intended to ease the burden on bankers remain politically unpopular

City of London
City of cities: more money passes through this square mile each day 
than through any other patch of land on earth. Photo: iStock 

By Michael McKenna

In 1983, British comedy troupe Monty Python released a short film called "The Crimson Permanent Assurance” in which a staid old London company sails across the Atlantic to do battle with its US rival, The Very Big Corporation Of America.

At the film’s climax, the Assurance Company’s Edwardian offices detach from the City of London and turn into a pirate ship (a vignette also seen at the start of The Meaning of Life). As they approach Manhattan, which manifests as a sheer wall of infinitely tall glass skyscrapers, it appears as though they are overmatched. Their stately London block is miniscule and outdated, and their only weapons are wooden filing cabinets and swords fashioned from ceiling fans.

In the film, of course, they won. Then they sailed off the edge of the world and died. But that’s beside the point: this was how Britain saw itself back then. In 1983, it made sense to portray London as a dowdy and withered thing and New York as a colossus. What is interesting is how that situation, over the course of the past 25 or 30 years, reversed itself.

The big bang theory

The same year that “The Crimson Permanent Assurance” was released, then-prime minister Margaret Thatcher and the London Stock Exchange agreed to settle an antitrust case launched by the previous government. 

The effect of the settlement was a broad deregulation that enabled outside ownership of Exchange member firms and effectively detached the City from its British context, allowing it to do battle on the high seas with the New Yorks and Hong Kongs of the world.

(As far as the broader piracy metaphor goes, I suppose it depends who you ask. I suspect Jeremy Corbyn might sign on, though…)

This move, termed the “Big Bang”, was the decisive action in returning London to its Victorian/Edwardian status as the world’s premier financial hub. Where the City was once the capital of a global empire, it is now the capital of global capital. But a report issued by the British Bankers’ Association yesterday claims that the City’s status is in danger.

Declining capital

“We have now reached a watershed moment in Britain’s competitiveness as an international banking centre”, states the report, adding that many international banks are moving jobs overseas and/or declining to invest in the British capital.

The figurehead for this decline is likely HSBC, whose future as a British bank is up in the air as management weighs the costs and advantages of keeping its headquarters in London.
According to the BBA, the amount of assets held by the UK banking sector have tumbled by 15% since 2011 while the same measure has grown by 12% in the US over this period. 

The gains seen in Singapore and Hong Kong, continues the report, have been even greater with the assets held by the two Asian financial giants having grown by 24% and 34% respectively.

Hong Kong
Even as part of the Empire, Hong Kong could give London a run for its money. Now that it's a gateway to the enormous Chinese economy, it's gaining even more ground. Photo: iStock

What globalisation giveth…

The BBA’s call for “urgent action” identifies wholesale banking as an “internationally mobile industry” which, it is implied, can and will settle only where the regulatory environment is most favourable. This is both London’s great advantage and its existential challenge.

There is no particular reason, save legacy and a convenient time zone, for London to be the financial capital that it is. Though poet (and Lloyd's Bank FX clerk) T.S. Eliot may have characterised the British capital as an “unreal city” in 1922, the claim was premature: In fact, the City of that era was the centre of an immense industrial and merchant empire and its pre-eminence in the realm of world finance was the product of distinct and highly particular political and commercial relationships.

This has vanished. As Russian president Vladimir Putin said in September 2013 (and as China’s Global Times repeated that same year), Britain is now just a small country, one among many. The fact that its capital remains home to the world’s most influential banking sector is the product of fortuitous positioning and an extremely indulgent legal environment.

Neither factor is set in stone.

The ties that bind

While the removal of the City from its British regulatory context was a boon, the much-discussed removal of the UK from the European Union is less likely to buoy the spirits of London’s embattled financial sector.

While UBS chair Axel Weber was out this week saying that a Brexit would not undermine the City, his is a distinctly minority view. 

Closer to the consensus is Morgan Stanley International CEO Colm Kelleher’s statement that "if Britain were to leave Europe you would see a significant backlash against London as a financial centre”. Over at Columbia Threadneedle, global equities head Mark Burgess concurs, telling Investment Week that pulling out of the EU would be “truly bad news” for the UK banking industry.

While PM David Cameron is surely aware of these factors, he is likely backed into a corner as a significant part of his conservative base are no fans of the European project and a distinctly pro-City stance would almost certainly see the Tories lose ground to Eurosceptic politicos.

In a similar vein, while the BBA cheers such developments as Chancellor of the Exchequer George Osborne’s recent dilution of a levy on UK banks and the dismissal of Financial Conduct Authority head Martin Wheatley, the idea of making life easier and more consequence-free for international bankers remains about as popular with landlubbers (voters) as the introduction of man-eating alligators to the pond in Regent’s Park.

A fine balance

The financial industry has only a small degree of latitude with which to respond to the BBA’s call for deregulation, de-taxation and the like. Although the UK economy, like its US counterpart, is posting strong employment numbers, phenomenally weak inflation (even deflation at two points this year) and a broader uncertainty concerning its recovery have placed the Bank of England’s potential move towards normalisation in peril.

Essentially, legal favours for bankers are a thing that, in parliamentary democracies, can only really be pushed through when times are good. And “less-than-disastrous” is not the same as good.

Although London’s peculiar second turn as the world’s financial hub is a major factor in Britain’s economic health and global profile, it depends near-entirely on the government’s extreme willingness to accommodate the needs and whims of transnational capital. 

Given how unattractive such indulgences generally are to the populace, the City’s status has a will-o’-the-wisp quality, a sort of pervasive unreality that may require more growth and optimism to sustain than Britain is capable of providing.

In the longer term, the UK's dilemma may be that while it cannot afford to lose its gleaming metropole, it cannot afford to keep it either. It would not take much – an unfavourable government, a pronounced economic downturn, a Brexit – for the circumstances that sustain the City in its present form to shift or vanish.

If this occurs, it won’t take long for the deregulation-fuelled capital to finally join Eliot's famous list of diminished cities:

Jerusalem Athens Alexandria
Vienna London
Unreal”.

Westminster
"Jolly good run, though:" Photo: iStock 

Michael McKenna is an editor at TradingFloor.com

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail