Financial centre


A financial centre or financial center is defined by the IMF as encompassing: International Financial Centres, such as New York City, London, and Tokyo; Regional Financial Centres, such as Shanghai, Seoul, Frankfurt, and Sydney; and Offshore Financial Centres, such as Cayman Islands, Dublin, Hong Kong, and Singapore.
is one of the oldest financial centres. London is ranked as one of the largest International Financial Centres in the world.
IFCs, and many RFCs, are full–service financial centres with direct access to large capital pools from banks, insurance companies, investment funds, and listed capital markets, and are major global cities. OFCs, and also some RFCs, tend to specialise in tax-driven services, such as corporate tax planning tools, tax–neutral vehicles, and shadow banking/securitization, and can include smaller locations, or city-states. The IMF notes an overlap between RFCs and OFCs. Since 2010, academics consider OFCs synonymous with tax havens.

Background

Financial centres are locations with a concentration of participants in banking, asset management, insurance or financial markets with venues and supporting services for these activities to take place. Participants can include financial intermediaries, institutional investors, and issuers. Trading activity can take place on venues such as exchanges and involve clearing houses, although many transactions take place over-the-counter, that is directly between participants. Financial centres usually host companies that offer a wide range of financial services, for example relating to mergers and acquisitions, public offerings, or corporate actions; or which participate in other areas of finance, such as private equity and reinsurance. Ancillary financial services include rating agencies, as well as provision of related professional services, particularly legal advisory and management accounting.

Definitions

FSF–IMF approach

In April 2000, the Financial Stability Forum, concerned about OFCs on global financial stability produced a report listing 42 OFCs. In June 2000, the IMF published a working paper on OFCs, but which also proposed a taxonomy on classifying the various types of global financial centres, which they listed as follows :
The IMF noted that the three categories were not mutually exclusive and that various locations could fall under the definition of an OFC and an RFC, in particular.

Rationale for OFCs

The IMF noted that OFCs could be set up for legitimate purposes, but also for what the IMF called dubious purposes, citing tax evasion and money–laundering. In 2007, the IMF produced the following definition of an OFC: a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy. The FSF annual reports on global shadow banking use the IMF definition to track the OFCs with the largest financial centres relative to their domestic economies.
: Mapping the links between financial centres
Progress from 2000 onwards from IMF–OECD–FATF initiatives on common standards, regulatory compliance, and banking transparency, has reduced the regulatory attraction of OFCs over IFCs and RFCs. Since 2010, academics considered the services of OFCs to be synonymous with tax havens, and use the term OFC and tax haven interchangeably.
In July 2017, a study by the University of Amsterdam's CORPNET group, broke down the definition of an OFC into two subgroups, Conduit and Sink OFCs:

Sink OFCs rely on Conduit OFCs to re–route funds from high–tax locations using base erosion and profit shifting tax planning tools, which are encoded, and accepted, in the Conduit OFC's extensive networks of global bilateral tax treaties. Because Sink OFCs are more closely associated with traditional tax havens, they tend to have more limited treaty networks and access to global higher–tax locations.

Rankings

Prior to the 1960s, there is little data available to rank financial centres. In recent years many rankings have been developed and published. Two of the most relevant are the Global Financial Centres Index and the Xinhua–Dow Jones International Financial Centres Development Index.

Global Financial Centres Index (2007–ongoing)

The Global Financial Centres Index is compiled semi-annually by the London-based think tank Z/Yen in conjunction with the Shenzhen-based think tank China Development Institute. As of March 2020, the top ten global financial centres per the GFCI article containing a ranked list of 108 financial centres were:
RankCentreRating
1 New York City769
2 London742
3 Tokyo741
4 Shanghai740
5 Singapore738
6 Hong Kong737
7 Beijing734
8 San Francisco732
9 Geneva729
10 Los Angeles723

Xinhua–Dow Jones Index (2010–2014)

The Xinhua–Dow Jones International Financial Centers Development Index was compiled annually by the Xinhua News Agency of China with the Chicago Mercantile Exchange and Dow Jones & Company of the United States from 2010 to 2014. During that time New York was the top-ranked centre.
According to the 2014 Xinhua–Dow Jones International Financial Centres Development Index, the top ten financial centres in the world were:
RankChangeCentreRating
1 New York City87.72
2 LondonĆ86.64
3 1 Tokyo84.57
4 1 SingaporeĆ77.23
5 2 Hong Kongć77.10
5 Shanghai77.10
7 Paris64.83
8 Frankfurt60.27
9 2 Beijing59.98
10 1 Chicago58.22

Appears on the FSF–IMF Offshore Financial Centre Lists.

Also appears as one of the top 5 Conduit OFC, in CORPNET's 2017 research; or

Also appears as one of the top 5 Sink OFC, in CORPNET's 2017 research.

Examples

Old finance centers such as Amsterdam, London, Paris, and New York have long histories. Today there is a diverse range of financial centres worldwide. While New York and London often stand out as the leading global financial centres, other established financial centres provide significant competition and several newer financial centres are developing. Despite this proliferation of financial centres, academics have discussed evidence showing increasing concentration of financial activity in the largest national and international financial centres in the 21st century. Others have discussed the ongoing dominance of New York and London, and the role linkages between these two financial centres played in the financial crisis of 2007–08.
Comparisons of financial centres focus on their history, role and significance in serving national, regional and international financial activity. Each centre's offering includes differing legal, tax and regulatory environments. One journalist suggested three factors for success as a financial city: "a pool of capital to lend or invest; a decent legal and taxation framework; and high-quality human resources".

Major IMF IFCs

New York, London, and Tokyo are in every list of major IFCs. Some of the major RFCs, such as Paris, Frankfurt, Chicago, and Shanghai appear as IFCs in some lists.
on Wall Street, the world's largest stock exchange by listed capitalisation.
in the City of London, the largest exchange in Europe by capitalisation.
, located in Nihonbashi-Kabutocho, Tokyo, Japan, is the largest stock exchange in Asia.
These centres appear in all FSF–IMF lists of OFCs and, bar the Caribbean OFCs of the Cayman Islands, the British Virgin Islands, and Bermuda, represent all the major OFCs. Some also appear as RFCs in various lists, particularly Hong Kong, and Singapore. They also appear on most lists of major tax havens, and on lists of the largest Conduit and Sink OFCs in the world.
opened in 2003.
In some lists, RFCs such as Paris, Frankfurt, Chicago, and Shanghai appear as IFCs, however, they do not appear in all lists. They are certainly major RFCs.
building, which dates back to 1879.
. Madrid's stock exchange is the world's second-largest in number of listed companies.

Pre 17th century

Primitive financial centres started in the 11th century in the Kingdom of England at the annual fair of St. Giles and in the Kingdom of Germany at the Frankfurt autumn fair, then developed in medieval France during the Champaign Fairs.

Italian ''city-states''

The first real international financial center was the City State of Venice which slowly emerged from the 9th century to its peak in the 14th century. Tradable bonds as a commonly used type of security, were invented by the Italian city-states of the late medieval and early Renaissance periods while Florence can be said to be the birthplace of double-entry bookkeeping from the publication and proliferation of the work of Luca Pacioli.

The Low Countries

In the sixteenth century, the overall economic supremacy of the Italian city-states gradually waned, and the centre of financial activities in Europe shifted to the Low Countries, first to Bruges, and later to Antwerp and Amsterdam which acted as Entrepôt cities. They also became important centres of financial innovation, capital accumulation and investment.

17th–18th centuries

Rise of Amsterdam

In the 17th century, Amsterdam became the leading commercial and financial centre. It held this position for more than a century, and was the first modern model of an international financial centre. As Richard Sylla noted, "In modern history, several nations had what some of us call financial revolutions. These can be thought of as creating in a short period of time all the key components of a modern financial system. The first was the Dutch Republic four centuries ago." Amsterdam – unlike its predecessors such as Bruges, Antwerp, Genoa, and Venice – controlled crucial resources and markets directly, sending its fleets to all quarters of the world.
During their Golden Age, the Dutch were responsible for three major institutional innovations in economic, financial and business history of the world:
In many respects, the 17th-century Dutch financial innovations helped shape the foundations of modern-day financial system of the world, and greatly influenced the financial history of many English-speaking countries in subsequent centuries.
By the early 1800s, London officially replaced Amsterdam as the world's leading financial centre. In his book Capitals of Capital, Youssef Cassis argues that the decline and fall of Amsterdam, as the world's foremost financial capital, was one of the most dramatic events in history of global finance.

19th–21st centuries

London and Paris were the world's only prominent financial centers throughout most of the 19th century. After 1870, Berlin and New York grew to become major financial centres mainly serving their national economies. An array of smaller international financial centers found market niches, such as Amsterdam, Brussels, Zurich, and Geneva. London remained the leading international financial center in the four decades leading up to World War I. Since then, New York and London have developed leading positions in different activities and some non-Western financial centres have grown in prominence, notably Tokyo, Hong Kong, Singapore and Shanghai.

Rise of London

Rise of New York

Rise of Asian centres

In Asia, Tokyo emerged as a major financial centre in the 1980s as the Japanese economy became one of the largest in the world. Hong Kong and Singapore developed soon after leveraging their links with London and Britain. In the 21st century, other centres have grown including Toronto, Sydney, Seoul and Shanghai. Dubai has become a centre for finance in the Middle East, including for Islamic finance. The rapid rise of India has enabled Mumbai to become an emerging financial centre. India is also making an International Financial Center GIFT City from scratch. GIFT city is now functional and has already won the crown of fastest emerging International Finance Center of South Asia. Linked to the rise of these new IFCs, has seen the rise of "partner OFCs", such as Taiwan, Mauritius.
The private nationwide financial system in China was first developed by the Shanxi merchants, with the creation of so-called "draft banks". The first draft bank Rishengchang was created in 1823 in Pingyao. Some large draft banks had branches in Russia, Mongolia and Japan to facilitate the international trade. Throughout the nineteenth century, the central Shanxi region became the de facto financial centres of Qing China. With the fall of Qing Dynasty, the financial centers gradually shifted to Shanghai, mainly due to its geographical location at the estuary of the Yangtze River and to the control of customs in China. After the establishment of People's Republic of China, the financial centres in China today are Beijing, Shanghai, and Shenzhen.