The City of London specialises in bouncing back from reverses and exploiting the misfortunes of others. Most missteps in the financial, economic and geopolitical world — even those closest to home — have produced not only a rapid recovery in the City’s fortunes, but new and unforeseen opportunities. In the 20th century, leaving the gold standard and two world wars did no fatal damage. Foreign loans were still raised in the City in the interwar years (although that market had begun to move to New York), and the ‘bill on London’ remained a staple of international trade finance until the 1950s.
But the catastrophic impact of the second world war on the nation’s finances, and the decline in sterling’s reserve currency role, seemed to suggest a closing chapter in City history. And then along came a surge in US dollar liquidity in Europe that — combined with US ‘Regulation Q’, which placed ceilings on interest payable on bank deposits — set the stage for the emergence of the euro-dollar market in London. Ironically, the continuation of exchange control in the UK, abandoned in Germany and considered a negative by most, facilitated ‘guest currency’ business in the City, because it posed no risk to domestic monetary management. A perfect example of the City exploiting a misfortune.
The foreign loan market in London had died with sterling’s demise as a reserve currency, and was now firmly in New York. But another useful misfortune was on the horizon. Concern in the US over a growing balance of payments deficit produced the Interest Equalisation Tax, killing the dollar bond market for foreign borrowers in New York, giving birth to the Eurobond market in London and, following further capital export restrictions, sending blue-chip US corporates to that new market.
When the EU launched the single currency project, perhaps the greatest monetary misstep in history, the question became: can the City survive outside the eurozone? Tony Blair thought not. But Gordon Brown cleverly set criteria that were impossible to meet and we kept the pound. ‘Disaster!’ cried the experts.
The EU failed to create a single market in financial services. Meanwhile, the City’s unique concentration of banks, investment houses, markets, skilled people (-both British and expatriate) and supporting services meant that it became the financial capital of the eurozone — in the absence of an even mildly credible alternative, which might have emerged in a single financial services market.
Now we have a fresh presumed disaster to excite the City Cassandras: Brexit. If the City cannot maintain access to the single market in financial services through the passport system, all is lost. The problem with this disaster scenario is that there is no single market in financial services: no banking union, no single regulator, no European Stock Exchange.
There is no single ‘passport’ allowing EU financial houses to trade ‘across the EU’, as is so often claimed. An individual passport is required to distribute financial products in each member state.
But what about the wholesale financial markets at the heart of the City’s position as the premier global financial centre: the interbank, forex, interdealer markets, the securities, derivatives and commodities exchanges and corporate advisory services? How is it that today’s professional consumers of wholesale financial services throughout the EU are able to transact in non-passported centres such as New York, Dubai, Singapore, Hong Kong, Shanghai and Tokyo? Why would they be excluded from City markets if the UK was no longer in the EU passport system? Will the EU financial community be able to deal only among its members, turning its back on the global financial market?
Paris and Frankfurt want to replace London as a global financial centre. How would they do that without being able to deal with the rest of the financial world? The whole idea is ridiculous. Of course the City will prosper post-Brexit. It has no competitor and is the financial window on the world. The City’s adaptability is due to its breadth and depth. Other centres are parochial and less flexible.
And finally, a technological breakthrough known as blockchain is about to revolutionise finance, rendering redundant existing clearing systems for cash transactions. Because of the global role of the US dollar, a large swath of business might thereby avoid New York and US regulation. This could be another boost for London — as significant as Regulation Q was in the 1950s.
Stanislas Yassukovich was chief executive of European Banking Group and chairman of Merrill Lynch Europe. His ‘social and financial memoir’ Two Lives is published by Austin Macauley.