EUROPEANFINANCIAL CENTRESFINANCIAL TIMES SPECIAL REPORT | Thursday May 10 2012

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There has been only onehot topic of conversation inthe last few months in Paris– the French presidentialelections.

Paris financiers view withtrepidation the victory lastSunday of François Hol-lande over Nicolas Sarkozy,the outgoing centre-rightpresident.

In part this is because heis an unknown quantityboth as a person and politi-cally – he is the first Social-ist president after 17 yearsof right-wing rule – but alsobecause of his infamousstatement in January that:“My true adversary is theworld of finance.”

Mr Hollande followed upthis inauspicious messagefor the industry with a pro-posal to slap a tax of 75 percent on earnings over €1m,higher corporate taxes insome sectors, notablybanks, and a separation ofspeculative activities fromretail banking.

Philippe Goutay, financialregulatory issues specialistat Freshfields, the law firm,observes, though, that onfinance: “It is difficult toanticipate what would behis positions in this area ina context where regulationis mainly driven by Euro-pean legislation.”

Bernard Grinspan, part-ner-in-charge of the Parisoffice of Gibson Dunn, saysMr Hollande is unlikely tobe as dogmatic as FrançoisMitterrand, the last Social-ist president but that: “TheSocialists cannot go backon some promises such asgreater regulation, highertaxation. All of this willhave to happen, most likelywatered down, otherwisethey will be seen as betray-ing promises.”

He adds that people arelooking to escape highertaxes: “In the last sixmonths we are aware ofsome individuals and com-

panies that have looked ator have already relocated toBrussels, Singapore or Lon-don. A number of seniormanagers have requested amove – far more so thancompanies.”

The change in govern-ment comes at a delicatetime for the Paris financialmarket, as the financial andeurozone debt crises havealready thrown off course agovernment-inspired reformplan designed to boost thecentre’s clout.

The financial servicesindustry accounts for 4.5per cent of gross valueadded in France, equivalentto Germany’s and lowerthan the UK’s 7 per cent,according to GoldmanSachs.

Christine Lagarde hadearmarked the industry forwhat she called a “crusade”to promote Paris as a finan-cial centre when she servedas finance minister underMr Sarkozy, before leavingto head the InternationalMonetary Fund last year.

Measures included abol-ishing a stock exchange tax,simplifying rules on corpo-rate bond issuance with theAMF – the financial mar-kets regulator – and per-suading the French arm ofLCH.Clearnet, Europe’s

independent clearing house,to launch the clearing ofeuro-denominated creditdefault swaps in Paris.

“Christine Lagarde madea lot of structural changesand revitalised theexchange, especially on thefixed income side,” saysRoland Bellegarde, vice-president for European list-ing business and cash trad-ing at NYSE Euronext, thetransatlantic group that

operates the Paris and NewYork stock exchanges.

Arnaud de Bresson, man-aging-director of ParisEuroplace, a lobbying groupwhich includes companies,investors and banks, saysthat due to an alignment ofthe listing rules betweenParis and Luxembourg,France’s biggest companiesnow issue the majority oftheir bonds in Paris insteadof Luxembourg.

Only 25 per cent of theirissuance was via Paris four

years ago but that hasclimbed to 70 per cent.

Paris has risen two placesin the Global Financial Cen-tres Index compiled bythink-tank Z/Yen Group,though that still leaves itranked 22. The surveyassesses 77 financial centresaccording to market access,infrastructure and competi-tiveness, along with varia-bles to track the changingpriorities of finance profes-sionals.

The financial crisis hasthrown up some opportuni-ties for Paris.

The economic downturnled to fewer big companiesfloating on the market, saysMr Bellegarde, but insteadsmaller companies are turn-ing to NYSE Alternext,which is designed forsmaller and medium-sizedenterprises.

“Large corporates canstill get credit from banksbut smaller companies havea tougher time so we’veseen more and more comingon to the market throughNYSE Alternext, for exam-ple, to raise between €20mand €100m,” he says.

And Mr de Bresson pointsout that the new Basel IIIregulations, requiringbanks to hold more capitalagainst risk-weightedassets, herald a shift in theway companies raisemoney.

Whereas companies in theUS fund 80 per cent of theirneeds through the marketsand 20 per cent throughbanks, the inverse has beentrue in Europe – but it ischanging.

“One concrete issue for ushas been to accelerate thedevelopment of new corpo-rate bond markets in Parisbecause one of the conse-quences of the new finan-cial regulations could be aprogressive reduction inbank credit,” says Mr deBresson. “The new Euro-pean financing model mayevolve more in line with theAnglo-Saxon model.”

One danger that appearsto have been averted withMr Sarkozy’s election defeatis the threat of a stand-alone financial transactionstax in France. Mr Hollandeis in favour of a more com-prehensive tax but one thatis Europe-wide.

Victory for Hollande comesat tricky time for financiersParisThere is uneaseover the newpresident’s stance,says ScheherazadeDaneshkhu

‘The Socialistscannot go back onsome promisessuch as greaterregulation’

View of La Défence business district in Paris Dreamstime

Inside this issueLondonAre theCity’sworriesover itscompetitiveposition nomore thanthe natural paranoia of amarket leader? Page 2

Frankfurt Germany’sfinancial capital is standingup relatively well thanks tothe country’s financialstrength and export-ledindustrial prowess Page 2

Zurich The Swiss city’sfuture in many ways looksbrighter than someEuropean rivals, but it hasplenty of challenges of itsown. Page 2

Challenger cities Thesecond-tier cities such as

Geneva(pictured)take amorespecialisedapproach,while upand comingcentres

include Moscow, Istanbuland Warsaw. Page 3

Education Language issuescan be a problem, but theoverall quality is remarkablyconsistent Page 4

Regulation Nationaldifferences could beeradicated by Brussels’plans to create a levelplaying field Page 4

On the web Philip Staffordexamines the movement ofOTC derivatives intoclearing and the drive forconsolidation amongEuropean exchanges; EdHammond finds out wherebanker-level property moneygoes furthest; Sam Jonesasks whether Europe’s daysat the top in investmentmanagement are numbered.

Europe’s financial cen-tres have – againstalmost any measure –endured a tough time.

Upheaval in the eurozone,tougher regulation, tax crack-downs and – in some countries –a double-dip recession have sav-aged many business lines,shrunk profits and led not a fewfinancial professionals to looklongingly at Asia and NorthAmerica, where the horizonsseem less crimped.

Charles Ilako, head of finan-cial services regulatory consult-ing at BDO, says: “The financialcrisis has hit the eurozone like awrecking ball and none of thekey financial centres in theregion have escaped the fallout– Madrid, Dublin, Milan, Ath-ens, even Luxembourg have allbeen particularly hard hit.”

Yet the continent remains oneof the world’s great sources of

financial expertise and a criticalpart of the global monetary sys-tem. London, partly protectedby its own currency, has held onto its top ranking in the semi-annual Global Financial CentresIndex and remains the pre-emi-nent city for wealth and assetmanagement, professional serv-ices and government and regula-tion.

Zurich is also a top 10 cityoverall in the closely watchedsurvey, with high ratings forbanking, wealth and asset man-agement and insurance.

Frankfurt, Munich andGeneva all make the top 10 forparticular sectors, and the Ger-man cities in particular havebenefited from the close rela-tionships with that country’sstrong industrial base.

Richard Saunders, chief exec-utive of the Investment Manage-ment Association, says: “I thinkpeople are less wound up aboutcompetitiveness than they werea couple of years ago. We hadbeen tracking a growing worryabout London being less attrac-tive, but that seems to havegone away.”

The crucial issues for Europeover the next couple of yearstend to centre on tax, regulation

and stabilising the weaker mem-bers of the eurozone.

The situation looked grim lastyear, as Greece struggled towork out a deal with its bondholders and investors ques-tioned the health of French,Italian and Spanish banks. Trad-ers and bankers were unsettledby talk in Brussels of an EU-wide financial transaction tax(FTT) that they feared woulddrive up costs sharply.

Critics also worried thattougher bank capital and liquid-ity requirements would backfireby leading to a cut in overalllending. Most big Europeanbanks reported disappointing

results for 2011, accompanied byplanned lay-offs and big cuts topay packages.

But the clouds have partedsomewhat since December.

The European Central Bankgave the entire continent somebreathing room with its Longer-term refinancing operation(LTRO), which essentially givesbanks access to €1tn of low costfunding for three years. Ger-many and France have had littlesuccess in finding support for abroad FTT and trading perkedup in the first quarter.

Research by the InternationalMonetary Fund suggests thatwhile banks are solving their

capital problems by selling €2tnin non-core assets, most of thedisposals and cuts are takingplace outside Europe ratherthan hitting at domestic lend-ing.

The European centres alsoretain their historic advantages.As former centres of globalempires they have close ties tocountries around the world andare home to some of the world’slargest banks, huge networks ofprofessional service firms andsome of the world’s most impor-tant exchanges.

Switzerland has had to relaxsome of its privacy laws and haspiled some of the world’s tough-

est capital requirements on itstwo biggest banks, Credit Suisseand UBS, but Zurich, Genevaand the cantons around themcontinue to draw in hedge fundmanagers with their low taxesand friendly attitudes towardwealth management.

London’s language, legal sys-tem and convenient timezonepartway between Asia and theUS mean that it continues to bethe global centre of choice formany cross-border transactions.

John Ahern, partner in thefinancial institutions litigationand regulation group at Jones

Cities holdfirm amideurozoneupheavalFallout from the creditcrisis was widespread,but the main centresare still a huge sourceof knowhow, writesBrooke Masters

Brighter outlook: the situation looked grim last year, but the clouds have parted somewhat since December Dreamstime

Continued on Page 2

2 ★ FINANCIAL TIMES THURSDAY MAY 10 2012

European Financial Centres

Continued from Page 1

London Worries overcompetition easeLondon’s status as one of theworld’s leading financialcentres appears assured,writes James Pickford.

The financial hub of Europehas escaped relativelyunscathed from the worsteffects of the financial crisis.

It remains the biggest playerin a number of markets, suchas foreign exchange. The City’sregulatory guardians areundergoing reform, but themanaged upheaval has notsparked panic among investors.

Is it time to treat London’sworries over its competitiveposition as nothing more thanthe natural paranoia of amarket leader?

Chris Cummings, chiefexecutive of TheCityUK, a bodythat promotes Britain’sfinancial services industry,believes the capital’sfundamental attractions remainundimmed. But, along withother senior figures in the City,he is concerned about threatsto London’s status that arelikely to materialise not in thenext month but over the nextdecade.

Chief among these is the raftof 46 regulatory directivesaffecting financial services thatare currently passing throughthe European Commissionpipeline. “While each measureis well-intentioned and merited,the collective impact has notbeen assessed,” Mr Cummingssays. “We haven’t seen a trueanalysis of what the marketeffect will be followingimplementation.”

One such landmark change isSolvency II, a new set of EUrules for insurance companiesthat has raised the ire of theglobal sector – led bycompanies in London – for itshigh capital requirements.

Hugh Savill, director ofprudential regulation at theAssociation of British Insurers,says: “Solvency II is a goodidea in principle. But it is anexample of an idea taken overby frightened regulators afterthe financial crisis.”

Negotiations between financeministers and the Europeanparliament over Solvency II areexpected to be completed byJune. “We’re still fighting inthe trenches to get thingsright,” Mr Savill says.

The broader issue of“reciprocity” between marketsis also causing concern,especially in a market asinternationally oriented asLondon. EU and US regulatorsare increasingly requiringcompanies doing business intheir markets to follow thesame rules wherever else theytrade – even though otherselsewhere are free to ignorethem.

Mr Cummings says: “Wesupport the development ofregulatory standards and thesingle European market. Butwe mustn’t lose sight of thefact that it must be open toothers to trade into it and formember countries to dobusiness freely outside.”

London’s regulators are inthe midst of their ownprofound domestic reforms. TheVickers commission hasrecommended ringfencing retailand investment bankingactivities at UK banks. TheFinancial Services Authority isbeing carved in two, withresponsibility for banksupervision handed to the Bankof England. The Office of FairTrading is to be merged withthe Competition Commission.

Mr Savill says he is worriedthat the effort required is adistraction. “An awful lot ofsenior managerial energy isgoing into how these bodies are

going to work with each otherwhen there’s a lot of real workto be done. The uncertaintythis creates will cause peopleto reflect about whetherLondon will be a sensible placeto do business or not.”

Mark MacGann, head ofEuropean government affairsand public advocacy at NYSEEuronext, the exchangeoperator, highlights theworkload facing the FSA,Europe’s largest securitiesregulator.

He says: “It needs to beco-ordinated in its advocacy atthe European level. In a perfectworld, everyone would be inplace, but that’s not going tobe the case for some time.”

Against this regulatoryfoment, bright spots areemerging. Last month, GeorgeOsborne, UK chancellor,launched a drive to ensureLondon becomes a “westernhub” for trading in therenminbi, with support fromBank of China, HSBC andother banks.

While the initiative is in itsinfancy, it comes as HSBClaunched the first internationalrenminbi bond outside HongKong and China, and signals avote of confidence in London’sfuture.

Sushil Saluja, UK andIreland head of financialservices at Accenture anda board member ofTheCityUK, says: “Some40 per cent of all tradewith China is estimatedto be settled offshore. IfLondon can become theleading centre for thattrade globally, it willgreatly strengthen itsposition.”

The City of Londonhas told the FT it hassigned an agreementwith the Torontofinancial servicesalliance – followingsimilar deals withMoscow and Dubai –under which the twoorganisations willshare financial, legaland regulatoryexpertise.

More suchagreements withother countries areexpected.

Mr Cummingssays: “The UKand Canada havea similar need forinfrastructureinvestment and ashared interestin developingprivate financeinitiatives thatreturn goodvalue to the

public, government and theindustry.”

Frankfurt Simplicitybrings rewardsFrankfurt, home to theEuropean Central Bank, knowsas well as anywhere the acuteproblems facing the eurozone,writes James Wilson.

Yet, while much of Europegrapples with austerity,Germany’s financial capital isstanding up relatively wellthanks to the country’sfinancial strength and export-led industrial prowess.

The financial centre has beenprotected by its focus onsimple products and lack oflocal asset price bubbles, suchas in property.

Signs of belt-tightening arethin on the ground in the city,whose high-rise skyline andinternational flavour contrastswith a compact size andpopulation of just 700,000.Unemployment remains lowand construction is continuingapace.

Some German banks did getinto huge problems in thecrisis. Frankfurt-basedCommerzbank, the country’ssecond largest by assets,

needed aid from thegovernment and faces apainful task of windingdown Eurohypo, its locally-based property subsidiary,under orders fromEuropean competitionauthorities. Like manybanks, Commerzbank alsoproved to be overexposedto struggling economiessuch as Greece’s.

However these problemshave been mitigated bythe outperformance ofGermany’s industrialcompanies, which haskept the lid on anyproblems of rising loan-loss provisions at home.

DZ Bank, one ofFrankfurt’s biggest,said in April after itsregular survey ofGermany’s industrialMittelstandthatcompanies werereporting the bestbusiness conditionsfor 16 years. “TheMittelstand will againbe a locomotive forGermany,” saysStefan Bielmeier,DZ’s chiefeconomist.

This corporatestrength makesGermanysomething of abeacon ofopportunity forbanks. Deutsche

Bank and Commerzbank, thetwo biggest German banks byassets, have reinforcedthemselves in their homemarket in recent years,recognising the importance of asolid domestic deposit base.

And Stefan Winter, a bankerat UBS and the head of theassociation of foreign banks inGermany, says the country willremain important forinternational banks, even asthey adapt their globalstrategies to new post-crisisregulation.

“As one of the largesteconomies worldwide and thebiggest in Europe, it willprobably remain a very goodenvironment for our membersto carry on all kinds offinancial services,” Mr Wintersaid recently.

Frankfurt’s importance isreinforced by the presence ofthe ECB and the FrankfurtStock Exchange, owned byDeutsche Börse. This remainsEurope’s most valuableexchange group – even thoughit failed in its goal of mergingwith NYSE Euronext to becomethe world’s largest exchangegroup.

At stake now for Frankfurt’sfinancial sector is the waypolicy makers at home andabroad introduce regulationthat improves the safety of thebanking system whilepreserving some of itsstrengths.

German corporate borrowersand banks have traditionallyenjoyed a close relationship,with companies more reliant onbank finance than in the US orUK. The crisis is changing thisrelationship somewhat, withcompanies building up greaterlevels of equity and alsomaking more use of debtcapital markets.

Some bankers in Germanyfear Basel III – the new globalrule book for banks – willmake corporate lendingincreasingly unprofitable byincreasing the amount ofcapital banks need to set aside.

“Lending capacity for theGerman economy will becurtailed,” says Germany’sassociation of savings banks,arguing for more lenient rulesfor these smaller banks.

Sabine Lautenschläger, vice-president of the Bundesbank,Germany’s central bank, sayssuch worries are overblown. “Iam confident the Germanfinancial system can adapt tothe new rules,” she told thefinancial sector in April.

Germany has made somedomestic post-crisis reforms,introducing a “bail in” regimeto wind down troubled banks –which should eventually be

harmonised at European level –and introducing a levy onbanks’ assets, extractingcontributions to pay for anyrescues.

To the dismay of banks, theGerman government remainskeen on a tax on financialtransactions, even though thisis seen as having little prospectof successful EU-wideimplementation.

In a recent survey by theFrankfurt-based Centre forFinancial Studies, more thantwo-thirds of participantsthought such a tax wouldsimply lead to business beingconducted in otherjurisdictions. “The financialindustry does not expect thatthis would influence behaviourin the way hoped,” says Jan-Pieter Krahnen, the centre’sdirector. “The assumption isthat the end-cost would bepassed on to consumers.”

Another thing Germanyneeds to avoid, according toAndreas Schmitz, president ofthe association that representsGermany’s commercial banks,is a separation of retail andinvestment banks such as isbeing proposed in the UK. Hesays the country needs topreserve the strengths of a“universal” banking system.

Globalisation is increasingthe demand among Germancompanies for “investmentbank” type services, such asforeign exchange hedging, aswell as new ways of raisingmoney in capital markets, hesays. “The current strength ofthe German economy isunthinkable withoutinvestment banking,” MrSchmitz, also chief executiveof HSBC’s Germansubsidiary, said in a recentspeech.

Zurich Model facesexternal attacksCompared with Frankfurt’sbank towers or the City ofLondon’s geographicallydelineated SquareMile, Zurich has nodiscrete financialdistrict, writesHaig Simonian.

Appropriatelyfor a countrywhere financialservicescomprise adisproportionately high 13-14per cent ofgross domesticproduct,Switzerland’sbig banks areeverywhere.

That

applies all the more so in thesatellite centres of Zug andPfäffikon within half an hourof Zurich and its internationalairport, but both convenientlyin ultra low-tax neighbouringcantons (Zug and Schwyz,respectively).

If Zurich’s financialpowerhouses are self-effacing,the hedge funds and tradersdotted around the nondescriptoffices of Zug and Pfäffikon arevirtually invisible.

But, confirmed by the clichédSwiss banker of internationalconspiracy films, finance is asessential to Switzerland’scommercial capital and itssatellites as snow is to thealps. As predictably, the havenSwiss franc’s recentappreciation may have upsetSwiss exporters, but it hasagain indirectly confirmedSwitzerland’s standing as abeacon of political andeconomic stability amid debtand uncertainty elsewhere.

Nevertheless, Zurich facesmixed fortunes as a financialcentre.

UBS and Credit Suisse, thetwo biggest banks,headquartered virtuallyopposite each other, faredrelatively well in the creditcrisis. UBS needed a temporarystate bailout and the help ofthe Swiss National Bank inoffloading some toxicsecurities. But even its wobble,born of overexposure to USsecuritisation, was relativelyshort. The fact that the groupwrote off more than $50bn inthe credit crunch may indeed

be a testament to thestrength of its foundations.

No Swiss bankcollapsed; none had to benationalised; and jobs

cuts, though unavoidable,were concentrated on NewYork and London investmentbanking subsidiaries.

Moreover, while Switzerlandhas since adopted some of theworld’s most stringent capital

standards for banks (the so-called “Swiss

finish” on top of internationalrequirements), both UBS andCredit Suisse – which, assystemically important banks,face the most demanding rules– and their smaller peers arecoping.

It has been a similar story atthe stock exchange. Thesurprise move four years ago tomerge independently runcompanies covering sharetrading, payments systems andfinancial information hasturned out to be well timed.

Linked by overlappingownership, the companies nowconstituting the SIX Grouphave provided stability at atime when securities tradingalone would have beenhazardous because of volatilevolumes and competition fromnew electronic platforms.

Switzerland’s traditionalfocus on private banking hasbeen Zurich’s other defenceagainst the vicissitudes thathave affected some rivalEuropean financial centres.Consolidation has taken placein private banking amidsluggish markets, cautiousclients and rising regulatoryburdens. But there has been nobloodbath.

Finally, Switzerland – andespecially the ultra low-taxcantons around Zurich – havebenefited from problemselsewhere in Europe.

In particular, rising fiscaland regulatory pressures onhedge funds in London haveencouraged an exodus. Manyhave shifted to Zug, others toGeneva – although the scale ofthe move should not beexaggerated, with the footsoldiers usually being left inthe UK.

But Zurich’s relatively “good”crisis does not mean it issitting pretty. Jobs have beenlost, as banks haveendeavoured to cut costs in amuch tougher trading andregulatory environment.

Private banking, inparticular, no longer representsthe job for life it once was.Once seen as much more stablethan volatile investmentbanking, the business is underpressure. Earnings in thesector have stagnated, asclients have avoided risk,cutting banks’ transaction fees.

Profits have also beendiminished by the strong franc,which has reduced the value,in franc terms, of clients’ euroor dollar denominatedportfolios, reducing the annualcharges the banks levy on theirclients’ accounts.

Most ominous has been thesteady erosion of Switzerland’shallowed bank secrecy. Manycountries, desperate to boostrevenues, have launchedonslaughts on tax evasion.High-profile legal disputesbetween Switzerland and theUS and Germany have batteredconfidence among clients andtheir advisers.

How a former haven for“black money” such asSwitzerland makes its plannedtransition to a model in whichall foreign accounts will be tax-compliant will be one of thegreatest challenges for Zurichin the years ahead.

So far, the process has beendistinctly choppy: while Swisspolitical and business leadersexpress determination to makethe change, Switzerland’spartners have taken the glovesoff.

This year has alreadybrought the first indictment bythe US of a Swiss private bank,coming on the heels of morethan three years of indictmentsof individual Swiss bankersand legal advisers.

Germany has become astough. The zeal of taxauthorities in some Germanfederal states to catch offendershas provided a big financialincentive for rogue Swiss bankemployees to steal, and thensell, confidential client data.

So, while Zurich’s future inmany ways looks brighter thansome European rivals,Switzerland’s leading financialcentre has plenty of unresolvedchallenges of its own.

Round-upFT writers reportfrom Europe’s threebiggest financialcentres – London,Frankfurt and Zurich

Main picture: Frankfurt has been protected by its focus on simple products and lack of local asset price bubbles

Day, the law firm, says:“There is no reason to sup-pose that the UK marketwill lose its position as theleading market in Europe inthe medium term. The lin-gua franca is English (incommon with North Ameri-can, Middle Eastern andAsian markets) and theLondon-based markets areextremely mature.”

Michael McKee, partnerat DLA, agrees: “The diffi-cult financial climate andheavier enforcement of cap-ital requirements are morelikely to drive away non-UKbanks – but most of thelarger banks have to be in

London for their interna-tional business, come whatmay. “

Frankfurt, meanwhile,benefits from strong busi-ness conditions for Ger-many’s industrial compa-nies and a property sectorthat avoided a bubblebefore the 2008 crisis. Glo-bal regulatory changes oncapital and liquidity willrequire some banks to makechanges, but the domesticdeposit base is solid.

Paris has slipped in theglobal city rankings inrecent years and its reputa-tion may suffer further asfunding-strapped Frenchbanks reduce their expo-sure to Asia. The recent

elections in France havealso unsettled markets andraised questions aboutwhere it is going as a finan-cial centre. Outgoing presi-dent Nicolas Sarkozy haschampioned the nation’sbanks in Brussels but alsopushed for an FTT, whilethe new socialist leaderFrançois Hollande haspromised to increase taxeson the wealthy.

A batch of other cities arealso hovering on the side-lines, seeking to snatchbusiness and expand theirfinancial sectors. Stockholmand Warsaw are regionalcentres, and the Russiangovernment is seeking toposition Moscow as a mag-

net for international busi-ness.

For cities within the EU,the big push in Brussels tostandardise financial regu-lation across the 27-nationbloc poses both challengesand opportunities. London-ers in particular fear thecommission will drive awayoverseas bankers, assetmanagers and investorswith rules that the Cityregards as misguided.

Among the most criti-cised are the FTT proposals,new curbs on bonuses andthe EU’s tough standardsfor fund custodians.

“London is Europe’sfinancial capital,” says Stu-art Fraser, outgoing policy

chairman at the City ofLondon Corporation. “Thatis often overlooked in Brus-sels. The success of the Citybenefits the rest of the con-tinent and vice versa.

“The City welcomesappropriate regulation thatis fit for purpose – whetherit is British or European inorigin.

“A reliable, stable regula-tory framework is in fact acompetitive advantage butwe must make sure that allthe consequences –intended and unintended –on competitiveness are rec-ognised and addressedwhere possible,” Mr Fraseradds.

But efforts to standardise

the rules across the entireEU also create opportuni-ties for the continent’sfinancial centres becausethey should make it easierto offer products to a widerarray of investors acrossnational lines.

In many cases, EU rulesshould also narrow theopportunities for regulatoryarbitrage, spur competitionand create a level playingfield.

Etay Katz, UK partner atClifford Chance, says: “Inthe end we are all going toend up in the same placebecause we are narrowingthe scope for national inter-pretation and creating cen-tralised institutions.”

Cities hold firm amid upheaval in eurozone

Big hubs keep the wheels of industry turning

ContributorsBrooke MastersChief RegulationCorrespondent

Christopher CookEducation Correspondent

Scheherazade DaneshkhuParis Correspondent

Ed HammondProperty Correspondent

Sam JonesHedge Funds Correspondent

James PickfordLondon and South-EastCorrespondent

Haig SimonianSwitzerland Correspondent

Philip StaffordReporter, FT Trading Room

James WilsonFrankfurt Correspondent

Ross TiemanFT Contributor

Andrew BaxterCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact Jim Swarbrick,+44 (0)20 7775 6220,email jim.swarbrick@ft.comor your usual representative

All FT Reports are availableon FT.com. Go to:www.ft.com/reports

FINANCIAL TIMES THURSDAY MAY 10 2012 ★ 3

European Financial Centres

S witzerland’s biggest cityranks a distant secondto Zurich in the GlobalFinancial Centres Index

(GFCI) published in March byZ/Yen Group.

Yet, commodity, trade andshipping finance standalongside asset managementand private banking as thecornerstones of a financialindustry that employs 35,600 inGeneva.

There are good reasons tothink that with internationaltrade growing, commodityprices volatile, and Switzerlandstill a haven in an uncertainworld and surrounded by awobbly eurozone, Geneva’sfinancial centre will continueto grow, and perhaps move upfrom 14th place in the GFCIranking.

But Steve Bernard, managingdirector of Geneva FinancialCentre, a trade association,prefers to focus on everydayissues that underpin thesuccess of his members.

“What is most important isto maintain a competitiveenvironment, ensure theavailability of skilled staff, andensure banks based in Genevacan develop their businesses inaccordance with theiropportunities,” he says.

That demand-led approachapplies in some other second-tier centres. Munich is up three

places to number 19 in theZ/Yen ranking; Luxembourgrose six to number 23; andStockholm gained three placesto number 25.

One feature of leadingchallengers is that they tend tobe specialised. Geneva’s MrBernard says: “We don’t havethe depth of services found inLondon, New York or HongKong, especially in investmentbanking; we therefore focuswhere we have a globally-recognised expertise: assetmanagement and commodityand trade finance.”

Geneva’s success in lookingafter other people’s money isunderpinned by Switzerland’sreputation, built over manydecades, as a safe place forprivate investors to park aproportion of their assets.

Though such assets maytoday be traced and taxed, areputation for probity, strongregulation, and a robustcurrency endure. Investorstrust Geneva’s bankers toincrease their capital.

Munich’s ranking restslargely on its insurers andthose that have blossomedalongside them. Allianz andMunich Re are the largestamong 60 insurance companiestogether employing 32,880 inthe Bavarian capital. They areserviced by a large bankingindustry and by aconcentration of private equity,venture capital and assetmanagement firms which helpput their premium income towork, including via Munich’sstock exchange.

Luxembourg, too, is buildinga global reputation by seekingto excel in selected financialservices, and lettingprofessionals chart its futurecourse. With 80,000 finance

sector workers generating aquarter of the Duchy’s grossdomestic product, Luxembourgis the largest investment fundcentre outside the US.

Fernand Grulms, chiefexecutive of developmentagency Luxembourg forFinance, says the Luxembourggovernment has identified five“pillars” for development of itsfinancial centre: assetmanagement and investmentfunds; wealth management forthe well-off; insurance andreinsurance; corporate finance;and structured finance.

A special advisory committeeflags trends to a nimblegovernment which can respondquickly to provide anappropriate legal framework,such as Europe’s first law toregulate family offices.

Stockholm, meanwhile, is thelargest financial centre in theNordic region, which hasproved relatively resilient toeconomic storms. Nordicfinancial centres have a

reputation for transparencyand good governance, and abanking system that hasproved robust.

Sweden benefits additionallyfrom a non-euro currency anda strong export performanceled by companies, such asEricsson, Volvo and H&M, thatare admired worldwide.

Foreign investors havelooked and liked. Nasdaq OMX,which runs stock exchanges inStockholm, Copenhagen andHelsinki on integratedplatforms, says the proportionof total equity traded in theNordics by internationaltrading members has risenfrom 50 per cent to 60 per centin the year to March.

Three other challengers, notyet in the GFCI top 50, meritattention. Moscow, which is afinancial centre for Russia andthe Confederation ofIndependent States, is widelyseen as a potential star, thoughtoday it is ranked 65 in theGFCI.

Both the Russian andMoscow governments arebacking a strategy to makeMoscow a leading internationalfinancial centre by 2020.

Several laws are beingdrafted to help give the city agreater role. One is designed toenable the creation of a unifiedcustody regime, which wouldgive stronger rights to ownersof securities.

A second is planned toliberalise rouble bond markets,making it easier for foreignersto trade Russian bonds.

Alexander Morozov, chiefeconomist for Russia at HSBC,says he expects gradual furtherexpansion of financial marketsin Moscow, underpinned byeconomic growth and the scaleof oil and gas exports.

But he doubts that Moscowwill become a global leaderwithin a decade.

“Capital tends to go where itfeels most comfortable,” saysMr Morozov. “At the moment,access to Russian capital

markets is better arrangedfrom London or Frankfurt.”

An outflow of Russiancapital, set-up difficulties forforeigners, and investor worriesabout corruption and thequality of Russia’s judicialsystem are also handicaps, hesays.

Istanbul (61st in the ranking)and Warsaw (54th) are comingon fast, however.

The Turkish city’s progress isreinforced by rapid growth inan economy of 75m people thatis set to rank 12th worldwideby 2050, says Murat Ulgen,chief economist for central andeastern Europe and sub-Saharan Africa at HSBC.

International confidence inIstanbul has risen, he says,because “the Turkish bankingsystem was tested by thefinancial crisis, and itperformed very well”. Inaddition, “Turkey proved a safehaven for its region during theArab Spring, attracting aninflow of funds and money

from businesses and wealthyfamilies, although inflationremains a concern.”

Poland’s capital, meanwhile,is emerging as the dominantfinancial centre in centralEurope, says Agata Urbanska,central and eastern Europeaneconomist at HSBC.

Poland has avoided recession,and its stock exchange hasmore than 400 companieslisted, including 40 foreigncompanies accounting foralmost a third of itscapitalisation, Ms Urbanskasays.

“Warsaw has grown at theexpense of financial centres inother recent European Unionmember states. It hasdeveloped into a centralEuropean hub.”

Other European cities in theGFCI top 50 are: Amsterdam(33), Vienna (34), Copenhagen(36), Edinburgh (37), Oslo (39),Glasgow (41), Helsinki (42),Dublin (46), Brussels (47) andMadrid (49).

Second tierfocuses onspecialisedapproachChallenger citiesRoss Tieman findscities from Stockholmto Istanbul offeringservices to match theirareas of expertise

Stockholm’s Cafe Opera: the Swedish capital is the largest financial centre in the Nordic region, which has proved relatively resilient to economic storms Alamy

4 ★ FINANCIAL TIMES THURSDAY MAY 10 2012

European Financial Centres

About five years ago inter-national financial centresroutinely bragged abouthow “understanding” theirlocal regulators were.

The UK Financial Serv-ices Authority in particularwon plaudits for its “light-touch” approach and otherregulators were urged tofollow its market-oriented style of supervi-sion. Meanwhile, the Euro-pean Commission’s mainwork on financial serviceswas focused on removingbarriers to a single market.

How things have changedin the wake of the neardeath of the world financialsystem in 2008.

The UK, which is launch-ing a new “twin peaks” sys-tem of regulation, has donea complete about-face. Itnow competes to be thetoughest supervisor andthe most aggressiveenforcer.

The European Commis-sion is generating reams offinancial rules, many aimedat reining in short selling,high-frequency trading,shadow banking and otherspecific activities. Threenew pan-EU supervisors,focusing on banking, finan-cial markets and insurance,are also seeking to imposeminimum standards acrossthe 27-nation bloc.

As national regulatorscrack down on practices asvaried as insurance riskmanagement and bankerpay, the quality and natureof their relationship withthe industry crucially deter-mines whether banks, assetmanagers and insurerswant to be located there.

The Bank of England andthe FSA are consideredleading thinkers on manyof the critical regulatoryissues of the day, includinghow to make banks saferand guarantee oversightof over-the-counter deriva-tives and central counter-parties.

Richard Saunders, chiefexecutive of the InvestmentManagement Association,says: “The regulators inLondon have definitelytoughened up theirapproach. What the FSAhas got going for it is goodindustry knowledge – and ithas that advantage over thecontinental regulators”.

But the UK, burnt by thecollapse of several bigbanks in 2007-08, and theSwiss, who have to back-stop two of the world’s big-

gest banks, have tended totake a tougher line thansome of their eurozonepeers on issues close to theheart of European bankers– and the bottom lines oftheir banks – such as thequality of bank capital andthe need to hold additionalliquidity.

French and German regu-lators have argued in Brus-sels and at the global rule-making body in Basel, Swit-zerland, for lower capitalrequirements and longertransition periods.

They have also spoken upfor local variants on the tra-ditional banking model.France has sought specialtreatment for its conglomer-ates, which combine bank-ing and insurance, whileGermany has fought hard

to protect the unusualforms of capital issued byits Landesbanken.

“Within Europe there is apartly unlevel playing fieldas a result of regulatorsapproaching the rules dif-ferently,” says BenedictJames, partner at the lawfirm Linklaters.

He believes the FSA isstricter than most: “Thosewho approve of more flexi-ble interpretation of therules might see it as prag-matism, while disapproversmay describe it as regula-tory capture.”

French bankers havetheir own cross to bear –the country is movingtoward imposing a financialtransaction tax (FTT) thatcould push up costs formany financial activities.

While the UK has opposedcreating an EU-wide FTT itis in the process of impos-ing additional capitalrequirements, along with

Sweden and Switzerland.Etay Katz, partner at the

law firm Allen & Overy,says the UK is playing arisky strategy, because it isthe “crowd leader” on manyissues. “Either you comeout as the benchmark regu-lator or you come out as thenightmare regulator whoforces some business tomigrate,” he says.

Participants in competi-tiveness surveys, includingthe twice-yearly GlobalFinancial Centres Index,routinely cite a fair and pre-dictable regulatory regimeas central to a city’s attrac-tiveness.

“Nowadays regulators arenot seen by the industry asbeing particularly co-opera-tive anywhere,” saysMichael McKee, partner atDLA. “Regulators havebacked off anything thatmight be perceived to laythem open to claims ofindustry capture.”

He says the reputation ofthe UK, Scandinavia andthe Netherlands is betterbecause of their industryknowledge and greater con-sultation in advance ofchanges.

Charles Ilako, head offinancial services regula-tory consulting at account-ancy BDO, agrees: “Londonprovides a secure and trans-parent environment inwhich firms can operate,grow and remain stable.”

That has given an edge toLondon, which routinelytops the worldwide GFCIlist for government and reg-ulation, with its nearestEuropean competitors,Frankfurt and Paris, wellbehind in joint fifth place inthe latest survey.

But some experts believethe differences could beeradicated by Brussels’drive to standardise regula-tion and supervision acrossthe bloc through directiveson topics as diverse asderivatives, bank capitaland hedge fund managers.

Jacqui Hatfield, Londonpartner at the Reed Smithlaw firm, says these direc-tives, which include finesfor jurisdictions that do notcomply “will make it moredifficult for member statesto compete as a ‘soft juris-diction’”.

But some predict that ifthe rules are poorlydesigned the entire conti-nent will suffer.

Stuart Fraser, policychairman at the City ofLondon Corporation, says:“If business is driven fromLondon by poorly conceivedor implemented regulation,it will not go to anotherEuropean centre.

“Instead it will go to NewYork or Asia, which areLondon’s true competitorson the global stage.”

Wariness over EU’slevel playing fieldRegulationNational variationscould be eradicatedby Brussels, writesBrooke Masters

If business is drivenfrom London bypoor regulationit will not goto anotherEuropean centre

UK regulator: tough enforcer

Before they consider regula-tors, corporate tax regimes oroffice space, companieschoosing a site for a new out-

let need to ask themselves one impor-tant question: would my employeeswant to live in that place? Knowingabout local schools is essential toanswering that question.

“Education usually comes in the topfive ‘deal breakers’ for potentialassignees who have families,” saysSusan Gregory, from KPMG’s globalmobility advisory services. “I haveknown situations where assignmentsare refused because the education sit-uation can’t be resolved.”

Some problems, for businesses lur-ing employees overseas, are unavoida-ble: language, for example. Lessoncontent also varies widely, even insubjects such as maths. At its mostextreme, no two countries teach theirchildren the same history, let alonethe same history syllabus.

So moving to, or from, a specialisedtechnical education to a generalistone is particularly stressful. This com-plicates moving to and from countriessuch as the Netherlands, Germanyand Belgium which use academicselection widely to select children fordifferent educations.

Footloose children may also endurecatching-up – or repetition – at spe-cific points in their school lives, par-ticularly when young: pupils muststart school in England, Scotland andthe Netherlands at the age of five.Across much of Europe, formal

schooling begins at six.Another problem stalks the conti-

nent at present: birth rate swings. Ifyour children happen to be joining abig cohort, you may find you are join-ing the back of a long queue forresources and attention. This is cur-rently the fate for parents of youngchildren in the UK and France.

In England, a rising birth rate isproblematic enough: by 2015, theDepartment for Education expects a10 per cent increase in the size of thecohort entering schools – with a par-ticular pile-up of children in the capi-tal. Getting a place at a good school isincreasingly tricky.

The number of annual live births inFrance, which was nearly as low as700,000 in the mid-1990s, comfortablybroke 800,000 in the late 2000s – andthose children are now entering theschool system. Access to the bestinstitutions will be a little more diffi-cult to gain for that cohort.

It is difficult, however, to claim anyof Europe’s big financial centres isserved by a much better overallschool system than another: theOrganisation for Economic Co-opera-tion and Development’s Pisa tests,standardised tests sat by 15-year-oldsaround the world every three years,reveal a remarkably consistent pic-ture.

All west European countries enjoysimilarly effective school systems.Only the Netherlands and Finland aresignificantly above the OECD memberaverage for all of maths, literacy andscience. Despite their national

mythologies, the UK and France aresimilar, sitting a little behind Ger-many.

There are, however, some big differ-ences in the private, non-state sector.For wealthy parents who intend tosend their children to elite universi-ties equipped with a strong social net-work, the British capital is unchal-lengeable. London has a global lead ineducating the children of the rich.

Indeed, part of the City’s success isdown to London’s schools. With awide variety of prices and styles,occupying buildings that range frompurpose-built 1960s blocks through tomedieval cloisters, the city’s wealthi-est children are taught in some stun-ningly well-equipped schools.

The strength of the system is suchthat 26,000 foreign pupils are studyingin the UK’s private boarding schoolswhile their parents are abroad. Morethan one third of these children arefrom China. Germany is in secondplace, with 12 per cent of foreignboarders with parents overseas.

As Janette Wallis, editor of theGood Schools Guide, says: “One of thereasons London is attractive to therich is its range of excellent, worldclass, schools.” Part of the reason forthis strength is tradition: its wealthyhave always opted out of state educa-tion.

The UK government estimates that15 per cent of London children areprivately educated: according to theIndependent Schools Council, 45 percent of the UK’s 1,200 private schoolsand 43 per cent of the privately-edu-cated pupils are in London and thecounties of the south-east.

But there are other reasons. Eng-land also has the continent’s best uni-versities. There are five British uni-versities ranked above any French orGerman institutions in the annualShanghai rankings of world universi-ties: Oxford, Cambridge, Imperial Col-lege, University College London andManchester.

Schools are plugged into these insti-tutions. Ms Wallis says: “WestminsterSchool [a co-educational day andboarding school in central London]sends around one third of its pupils toOxbridge, and schools like St Paul’sand St Paul’s Girls [both in London]aren’t far behind.”

A particular advantage enjoyed byBritish schools in accessing UK uni-versities is the A-level, a narrow, sub-ject-specific qualification which forcesspecialisation. This qualification isliked by British universities, which

offer extremely narrow undergraduatedegrees.

Even if students are ill-suited toEnglish universities, UK schools areincreasing their effectiveness at win-ning admission for pupils to institu-tions in other countries – particularlythose in the US. Independent schoolssend 2.7 per cent of pupils to univer-sity abroad.

A quarter of schools in the Inde-pendent Schools Council census saidthe number was increasing. Ms Wallissays schools “bring in educational

consultants to advise pupils on apply-ing to US universities and schools arevisited by the US universities.”

In addition, the city has bilingualschools, Saturday clubs and nurseriesfor speakers of every language. Par-ents worried about their children’sheritage can take them along to NewMaldon’s Korean clubs, the FrenchLycée in Kensington or the Germannursery in Herne Hill.

London has problems, but schoolingfor the offspring of the well-heeled isnot one of them.

Footloose pupils can get lost in translationEducationLanguage problems areinevitable but the qualityof schools in the maincentres is consistent,writes Christopher Cook

Different class: the French Lycée in Kensington, London, caters to parents worried about their children’s heritage AFP

For wealthy parents whointend to send theirchildren to eliteuniversities, the Britishcapital is unchallengeable