The Dark Side of NY–LON: Financial Centres and the Global Financial Crisis

Abstract

This paper brings financial centres into the debate on the causes and consequences of the global financial crisis, by focusing on New York and London. It argues that the degree of commonality, complementarity and connectivity between the two leading global financial centres justifies the use of the term ‘the New York–London axis’ (the axis). It shows that the global financial crisis 2007–09 originated to large extent in the axis rather than in an abstract space of financial markets. The dominance of the axis in global finance can be easily underestimated and evidence suggests that, contrary to expectations the axis is not in decline. The main implication is that the debate on global financial reform has to take seriously the reality of global financial centres. In particular, if global finance is to change, the New York–London axis has to change.

1. Financial Centres in Question

Research on financial centres has co-evolved with broader fields of urban studies as well as economic geography and history. In one of the first accounts on the formation of financial centres, Kindleberger (1974) devotes his attention to the evolution of financial centres within major national economies. Only the last part of his book describes financial centres in an international context, including a famously failed prediction that Brussels would become the leading financial centre of Europe. Since the 1980s, parallel to the rise of studies on globalisation, however, the study of relations between cities has undergone a shift from focus on national urban systems to relations between cities at an international level. A major milestone was the world city hypothesis by John Friedmann (1986), which linked urbanisation to global economic processes, with manufacturing activity migrating from high- to low-wage regions and countries creating demand for control functions, the realm of corporate headquarters and producer services, concentrated in select cities. In his hierarchy, Friedmann places London and New York as two of the six primary cities in core countries, alongside Paris, Chicago, Los Angeles and Tokyo. Building on Friedmann’s work, Saskia Sassen (1991) developed a global city hypothesis, with a focus on producer services, rather than corporate headquarters of manufacturing and non-producer service firms, as the main actors of global cities and on New York, London, and Tokyo. While both world and global city concepts place cities in the context of global economic change, they stress international competition between and the hierarchy of cities. This focus is reflected in work on financial geography, illustrated by contributions on the hierarchy of international financial centres, based on the study of attributes of individual centres (Reed, 1981; Choi et al., 1986).

The next major shift came with Manuel Castells’ (1996) work on the network society, stressing the prevalence of the space of flows (money, people, goods and information) over the space of places (cities and countries) in the contemporary economy. This led to rethinking the system of cities as a network, whereby the position and power of a city are determined by its connectivity with other cities, and relations between cities pictured as a complex combination of collaboration and competition. A leading effort in this area is the Global and World City (GaWC) project, with broad empirical focus, covering office networks of producer services firms in hundreds of cities (Beaverstock et al., 2000; Taylor, 2004). This shift from competition and hierarchy to networks and relations between cities has also been articulated in works on financial centres, with measures of connectivity incorporated into the rankings and hierarchies of financial centres (Tschoegl, 2000; Choi et al., 2003). From this perspective, international financial centres are viewed as a spatially distributed network of money and power, where the global and local processes intermesh and run into each other in a variety of ways (Amin and Thrift, 1992; Allen and Pryke, 1994).

Within the network perspective, of particular relevance to this paper are studies that focus on relationships between selected financial centres. Beaverstock et al. (2001, 2005) investigate London’s and Frankfurt’s relations as world cities, arguing that a simple competitive model is wholly inadequate to understand their development in the context of the launch of the euro. Their findings highlight the increasing connectivity between London and Frankfurt, based on increasing flows of knowledge, culture, power and governance, as well as co-operation between firms and authorities in the two cities. In a similar vein, Faulconbridge argues that

We need to move away from investigating attribute properties such as financial turnover and instead examine the role of networks and interdependencies in producing financial geographies (Faulconbridge, 2004, p. 235).

The study shows that the sustained dominance of London’s global financial networks is complemented rather than threatened by Frankfurt’s role as the home of the European Central Bank. In his words

All of the European international financial centres are complementary to one another, with Frankfurt’s European role complementing London’s more global role (Faulconbridge, 2004, p. 243).

This paper builds on the network perspective on financial centres in several ways. First, it focuses on relations between New York and London as arguably a more obvious and salient empirical choice than the London–Frankfurt connection. For Friedmann, New York and London were two of six primary cities in core economies. In Sassen’s early work (1991) they shared their global city status with Tokyo, but her later work (1999) acknowledges the decline in the status of Tokyo. According to the GaWC, their connectivity is incomparable with any other cities. This phenomenon is referred to as the ‘New York–London dyad’, the ‘transatlantic core, the ‘apex of globalisation’ or the ‘global twin-cities’ (Taylor et al., 2011; Taylor, 2004). Castells (2010) refers to New York and London as the mega nodes of the global network. To study the New York–London phenomenon, the paper uses an historical perspective, focused on the co-evolution of the two centres. In this respect, we build on the studies on the evolution of individual centres, with London in the lead (Michie, 1991). To be sure, the co-evolution of New York and London has to be put in the context of the development of other international financial centres, including offshore centres (Roberts, 1994; Wainwright, 2011).

The nature of connectivity between financial centres is explored through a focus on complementarities and commonalities. Complementarities are understood as differences that incentivise interactions, whereby a centre can contribute something unique to others. They can be based on specialisation in specific products or stages of financial intermediation, but also access to specific markets (Clark, 2002; Faulconbridge, 2004). Commonalities, in turn, are similarities that facilitate interactions, helping communication and transaction flows between financial centres. These are rooted in the formal and informal institutions and cultures of financial centres. It should be stressed that, while the role of legal and regulatory systems, as well as cultural factors, in the development of financial centres has been documented, few studies focus on these factors as critical in the formation of financial networks and relations between individual centres (Hall, 2010; Leyshon and Thrift, 1997).

Thirdly, within an account on the co-evolution of New York and London as international financial centres, the paper investigates the role of the two centres in the global financial crisis and charts their development in the years following the crisis. This addresses an important research gap, as financial geography seems biased towards research on the growth of financial centres rather than their development in adverse economic conditions or their role in financial crises. A notable recent exception here is work highlighting the role played by the peripheral location of Northern Rock in its demise and the impact on the local labour market (Marshall et al., 2012; Dawley et al., 2011). French et al. (2009) stress the role of global financial centres in generating the conditions leading to the financial crisis in 2007–08. Drawing on GaWC data, Derudder et al. (2011) document an emerging shift of international banking centres from ‘West to East’ in 2008. Highlighting the paucity of work on this area, Martin (2011) calls for effort to contribute to the geography of financial crises.

Finally, charting the development of New York and London before and after the eruption of the global financial crisis in 2008, a network approach is used that does not neglect various attributes capturing the size of financial centres entirely in favour of connectivity measures. Financial stocks and flows are anchored in particular places, being maintained and orchestrated by people (with their hardware and software) operating in specific places. Put differently, agglomeration and cluster economies matter to financial centre networks and vice versa. Reflecting on the excitement of commentators and scholars on the rise of Frankfurt as a potential challenger to London, what seems to have been forgotten in the heat of the debate is that employment in the City of London alone is larger than Frankfurt’s entire labour force (Beaverstock et al., 2001).

The paper refers to the relationship between New York and London as the New York–London axis. Susan Strange applied the term when referring to the special relationship between the US and the UK in matters of financial deregulation and re-regulation (Strange, 1998, p. 6). The term axis is used commonly (although not with reference to New York and London) in international relations literature implying agreement or alliance between two or more countries. Another meaning of the word axis, according to the Oxford English Dictionary is “a line through the centre of a rotating object”. This is close to Peter Hall’s observation that

London and New York are very special cities and in this sense represent the two poles of a transatlantic metropolis (Hall, 2003, p.31).

Links between New York and London have been so central to the process of globalisation in the past century that the level of globalisation of other cities is strongly affected by their connectivity to the axis.

The term axis is less neutral than dyad and brings up associations with power, which appears understudied in the literature on financial centre networks. Existing work recognises the power afforded to international financial companies via their networks and the influence of individual financial centres, but what about the power of various subsets and linkages within the financial centre network (Allen, 2010)? The New York–London axis describes a special relationship between these two cities in financial matters, underpinned by a special relationship between the US and the UK, central to the operation of global financial markets and the process of financial globalisation. To be sure, the objective is not to put the New York–London axis on a pedestal, as it is acknowledged that the power of the axis is embedded within its relations with other financial centres. The axis can be understood as an element of the network, but is more than a dyad leading in terms of density of flows. It has an explicit political element. The term axis is used to stress the uniqueness of the New York–London dyad among other relations in the world city network and to explore its implications.

The paper proceeds in four parts. The following section describes the relations between New York and London in a historical context. Section 3 focuses on the role of these relations in the global financial crisis. Section 4 analyses data on the position of New York and London in global finance, with particular attention to the impact of the crisis. The paper finishes with conclusions and implications for literature and policy.

2. A Brief History of the New York–London Axis

With the US as an offshoot of the British Empire, New York as a financial centre has its roots in London. New York won the domestic competition for financial supremacy throughout the first half of the 19th century, due in good measure to its role in intermediating trade between Europe and the rest of the US, and later in channelling British capital into the US economy (Kindleberger, 1974). US business was an important contributor to London’s supremacy as the global financial centre in the 19th century, just as London contributed to New York’s rise as an international financial centre. Key players in the growth of New York have been British merchant banks such as Baring Brothers and Brown, Shipley & Co. Those that did not appreciate the centrality of the axis, such as the Rothschilds, were outcompeted by those that forged and benefited from it, such as JP Morgan (Morrison and Wilhelm, 2007).

Despite the expansion of the US economy, the adverse impacts of World War I and a gradual decline of the British empire and economic prowess, New York never consistently succeeded London as a global financial centre. Even in the interwar period, co-operation between the centres was intense, as the US tried to help Great Britain restore the gold-sterling standard, by maintaining low interest rates and an artificially high USD to GBP exchange rate. According to Michie (2006), this actually fuelled a lending boom in the US which, followed by the Great Crash and the Great Depression, slowed down the growth of New York as a financial centre. On the other side of the Atlantic, the dogged attempts at restoring the gold-sterling standard, while serving the City had negative implications for British manufacturing.

With financial regulation after 1933, Roosevelt’s New Deal and the establishment of the IMF and the World Bank after the Bretton Woods Conference in 1944, the power moved from Wall Street to Washington, DC. London did not flourish either, struggling with depression in the British and European economies and the destruction of World War II. Public and domestic finance dominated over private and international finance on both sides of the Atlantic from 1930s to late 1950s, marking the lowest point of the axis in its 20th-century history. New York was a larger financial centre, but its power was based almost entirely on the domestic market. Importantly, although the international power of Wall Street was contained, the domestic power of New York was consolidated, as securities market regulation contributed to the demise of regional exchanges, as well as the nation-wide expansion of New York headquartered brokerage firms like Merrill Lynch (Michie, 2006).

In the late 1950s, Euromarkets breathed life back into the axis. The key initial decision was the agreement of the Bank of England in 1958 to allow British banks to take deposits and make loans in USD (Strange, 1997). In the late 1960s, 80 per cent of Euromarket borrowing and lending was conducted through London (Cassis, 2006). Euromarkets were dominated by US bank branches in London, pushed out of the US to escape restrictive banking regulations, which aimed at preventing capital outflow from the US. As Cassis put it

While American banking legislation thus strengthened London’s international role to the detriment of New York’s, American banks took full advantage of the situation, dominating the Euromarkets and integrating them into their global strategy (Cassis, 2006, p. 227).

The shift to floating currencies in the 1970s contributed to a boom in foreign currency trading, which concentrated in New York and London. In this way the power was released from Washington, DC, but not so much to New York itself but to the New York–London axis, now integrated more than ever before. In Andrew Walter’s words

London regained its position as the centre for international financial business, but this business was centred on the dollar and the major players were American banks and their clients (Walter, 1991, p. 182).

As Susan Strange put it

Who can say that the internationalization of American banking would have taken place so fast and furiously if London had not been there, ready and waiting with ‘Welcome’ on the mat? (Strange, 1997, p. 38).

In the 1970s, London established its position as the centre of US banks servicing US corporations operating in Europe, and recycling petrodollars.

After the chaotic 1970s, consistent financial deregulation in the US and the UK of the 1980s allowed the axis to boom. The Big Bang of 1986 unleashed a new wave of US banks entering and consolidating their role in London. It also speeded up the transition from the culture of class privilege to smartness and more open hiring practices, making London more like New York (Leyshon and Thrift, 1995). Canary Wharf, a new prime location for finance developed in the early 1990s, occupied mostly by large institutions, operated more like New York than the traditional City, with a myriad of small financial firms (Amin and Thrift, 1992). In the same period, Tokyo challenged the axis, but it relied mainly on the domestic market, with relatively few links with foreign institutions. Investment bankers in Tokyo never lost a sense of inferiority in relation to Wall Street and the City (Miyazaki, 2003). In 1991, Tokyo imploded under the weight of a real estate bubble and has not recovered since.

The accelerated financial integration in the European Union in the 1990s and 2000s has consolidated the role of London as a centre of European wholesale finance and a gateway for US financial institutions. There were fears of Frankfurt challenging London, but these underestimated the power of London and ignored the role of the axis. London became the centre of financial transactions in the euro. A wave of mergers and acquisitions following the launch of the euro offered lucrative deals for London-based investment banks. London has also become the agent of Wall Street’s shareholder value revolution of the 1980s and 1990s, which spread to Europe in the late 1990s and early 2000s (Wójcik, 2002). Security concerns after 9/11 and the more stringent reporting requirements in the US of the Sarbanes–Oxley Act further reinforced the position of London in the axis. New York, however, boomed as a financial centre, as further deregulation, with the repeal of the Glass Steagall Act in 1999 and the Commodity Futures Modernisation Act of 2000, paved the way for unprecedented profits and bonuses for Wall Street investment banks.

Throughout history, the development of the New York–London axis has been underpinned by strong commonalities and complementarities. The cities share a common language and common law, and a strong tradition of economic and political liberalism, a fertile ground for belief in the self-regulation of business and finance, as well corporate governance and accounting standards geared towards business owners rather than other stakeholders (Morck, 2005). Peck and Tickell (2002) referred to New York and London as the principal sales offices of neo-liberalism (alongside Chicago and Washington, DC). New York and London form the financial axis of the Anglo-American (Anglo-Saxon) culture. Its political, cultural and business élites interact closely, leading to a whole lifestyle based on a fusion of London and New York (Smith, 2005). This led to the term NY–LON, coined in the Newsweek’s article stating that

as different as New York and London are, a growing number of people are living, working and playing in the two cities as if they were one (McGuire and Chan, 2000, p. 42).

While commonalities between New York and London allow financial firms and professionals to move almost seamlessly between the two centres, lowering the cost of interactions, complementarities create opportunities, making interactions highly profitable. While New York commands access to the largest and most liquid domestic financial market in the world, London’s physical, political and historical geography implies access to a different time zone, European markets and global connections (for example, with India, Hong Kong and Australia)—the legacy of the Commonwealth. London is the place where US banks can employ French- and German-speaking experts, who want to stay close to their home countries. Taking advantage of its sheer liquid domestic market and the deepest pool of financial engineering talent, New York leads financial innovation (Strange, 1997). Hedge funds come from the US and so do venture capital and private equity. Most new products and methods of trading in the global securities markets emanated from New York (Michie, 2006). London, in turn, has specialised as a centre where financial firms (with US banks in the lead) adapt financial innovation from the US to foreign and international markets. A number of innovations from US retail banking, including data processing centres and telephone banking, have been adopted in the UK before spreading to the rest of Europe (Leyshon and Pollard, 2000).

Connectivity between London and New York is also served by physical infrastructure. No cities are connected by a denser web of fibre optics lines, more regular flights or transmit more information between each other (Warf, 2006). The world’s first teleport located on Staten Island in 1981, an office park with satellite earth stations connected to fibre optic cables, was operated jointly by Merrill Lynch and the Port Authority of New York and New Jersey (Warf, 1995), highlighting the role of finance in forging connections between the two cities. It is a combination of commonalities and complementarities that has driven the connectivity of New York and London and their co-evolution as leading centres in the global urban and financial system.

3. The Axis in the Global Financial Crisis

Interpreting the global financial crisis, we need to acknowledge the role of the New York–London axis. If we start with the house price bubble fuelled by mortgage lending, we should note that, in the UK, property prices in London in the late 1990s started their ascent earlier and by 2007 grew by a higher percentage than anywhere else in the UK. In the US, New York was among leading cities in terms of property price increases in the early 2000s (Martin, 2011). As global media centres, New York and London are homes to media companies that sustained the irrational exuberance, perpetuating the myth of property as a safe and profitable investment, a behaviour undoubtedly influenced by buoyant real estate markets in these cities (Shiller, 2008). This argument resonates with cultural geographies of finance, viewing financial centres as networks of actors developing stories and interpretations of the world economy and spreading those to the rest of the world (Allen and Pryke, 1999). In other words, financial centres play a significant part in the herd behaviour that fuels financial crises (Clark and Wójcik, 2001).

Another explanation of the crisis stresses the role of global trade and financial imbalances. Large net exporters (mainly China) have been recycling their currency reserves investing in large net importing countries (mainly the US but also the UK), thus contributing to low interest rates and a glut of liquidity available for lending in the latter group of countries (Rajan, 2010). While this explanation is rooted in macroeconomics, the axis is relevant to it. New York and London are the financial centres of countries with the largest and one of the largest current account deficits respectively. Looking for foreign (particularly portfolio) investments, national governments, sovereign wealth funds and private investors from surplus economies turn to New York and London as places of investment or through which investments can be identified. The axis facilitates the recycling of global imbalances.

Financial deregulation at the root of the crisis was led by the US and the UK. The repeal of the Glass Steagall Act allowed deposit-taking banks to develop investment banking business; the Commodity Futures Modernization Act of 2000 left derivatives and OTC markets unregulated; while the Financial Services Authority in the UK maintained a flexible regulation regime, relying on self-regulation (Johnson and Kwak, 2010). Active lobbying of the financial industry contributed to deregulation, with competitive threat from foreign financial centres as one of the lobbyists’ major arguments. Financial companies, with investment banks in the lead, mostly operating in both New York and London could play US and UK authorities against each other to prevent and counteract restrictive regulatory measures. The move towards ‘light touch’ regulation was “a product not only of narrow sectoral and political interest but also of spatial competition” (French et al., 2009, p. 292).

Financial deregulation allowed the emergence of a shadow banking system in the US, with investment banks (such as Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley) and investment banking arms of bank holding companies (such as JPMorgan Chase and Citigroup) as key players. They were major buyers of mortgages and asset-backed securities from mortgage originators and other banks; inventors of collateralised debt obligations (CDOs) and credit default swaps (CDS) (Tett, 2009); major sellers of CDOs to institutional investors around the world; and major investors in these assets. All of the key investment banks involved were the icons of Wall Street, headquartered in New York, with major offices and operations in London. Securitisation of mortgages was for the first time exported from the US in 1986 through Salomon Brothers’ office in London, which sold securitised mortgages to investors in the UK and Europe (Wainwright, 2009). London has established itself as the leading centre of mortgage securitisation in Europe, for both UK and foreign mortgages (Pryke and Lee, 1995; Aalbers, 2009).

The operation of the shadow financial system through the axis can be illustrated with New-York-headquartered AIG, one of the world’s largest insurance companies. In September 2008, AIG was bailed out by the US to prevent its imminent bankruptcy, caused almost single-handedly by AIG Financial Products (AIG FP), a subsidiary headquartered in Fairfield, CT (an extension of the New York city-region along the northern coast of Long Island Bay), with main operations in London. AIG FP in London was a leader in the issuance of CDS, and the sale of CDS as well as CDOs to customers in the US (for example, Goldman Sachs) and Europe (for example, Société Générale). The lowest amount that the AIG FP CEO in London, Joseph J. Cassano, awarded himself annually between 2002 and 2007 was US$38 million. Prior to 2007, AIG FP was not only the most profitable part of AIG, but was also referred to as the “golden goose for the entire [Wall] Street” (National Commission, 2011), reflecting its key role as the conduit of CDO and CDS production and distribution in Europe.

A lesser-known factor that facilitated the operation of the shadow banking system involves offshore financial centres, connected to and co-established by financial firms from New York and London (Palan et al., 2010). Granite Master Issuer Plc & Associates, a vehicle used by Northern Rock for its reckless investments in CDOs and related instruments, was registered in Jersey, which helped to obscure its activities from the FSA. Many Special Purpose and Special Investment Vehicles used by US banks to create and finance CDOs were registered in tax havens (Tett, 2009). Another question mark is the role in the crisis of the International Financial Services Centre Dublin, which was created mainly by the City and Wall Street firms when the axis boomed in the 1990s, taking advantage of Ireland’s commonalities with the UK and the US market environments (Warf, 1995). Indeed, one could ask the question whether the disastrous attempt of Iceland to become ‘the investment bank’ of Scandinavia was not helped by its convenient location on an alternative flight route between London and New York. The availability of attractive golf courses in both Ireland and Iceland could have also played a part, as they serve as an extension of office space for investment bankers (Ho, 2009).

Accomplices of investment banks in the shadow banking system were rating agencies, which rated CDOs highly (paid for this service by investment banks) and made them attractive to institutional investors, such as pension and mutual funds. The largest agencies—Standard & Poors and Moody’s—are headquartered in New York; the third-largest, Fitch Ratings, has global headquarters split between New York and London. We can and should extend the list of suspects to accountancy companies, which were supposed to evaluate the financial affairs of banks and warn the public; law firms, which were signing off investment banks’ contracts as not only legal but also undertaken in good faith; as well as management consultants involved in advisory work for corporations and institutional investors. New York and London are the leading centres of global accountancy, legal services and management consultancy networks. We should consider the global financial crisis as a failure of not only the financial sector, but of the whole business services complex (Wójcik, 2012b).

The New York–London axis was an important component of the multicausal mix that underpinned the global financial crisis. New York and London have served as platforms for firms and individuals, as social and cultural milieus in which the types of behaviour—an explosive combination of hubris and complacency—fuelling the crisis flourished. To be sure, the benefits of the financial sector bubble in New York and London were not shared with all people living and working in these cities. Nevertheless, a large number of firms and individuals from these cities and operating through them started the bubbles and then spread them to the rest of their countries and the world. In this way, they established themselves at the top of a pyramid scheme and benefited most. Those, often in peripheral locations, far from the axis, joined the pyramid last and lost most. We should remember that the Ponzi features intrinsic to asset bubbles have a geographical dimension at both the country and the urban level (Kindleberger and Aliber, 2005; Harvey, 2011). Evidence suggests that, in the wake of the crisis, the income gaps between New York and the rest of the US and between London and the rest of the UK have grown (Gaponomics, 2011).

4. Underestimated Power and Exaggerated Decline: Stocks, Flows and Networks

According to the GaWC financial network connectivity, using data on office networks of 75 financial service firms, London claims the top spot, followed by New York with 96 per cent of London’s connectivity (and Hong Kong third with 93 per cent). New York and London share the top two places in terms of connectivity in all other producer services (London in law and accountancy, New York in advertising and management consultancy). London and New York also claim the two top spots in the Global Financial Centres Index, launched by the City of London Corporation. London has maintained a narrow lead over New York since the first GFCI ranking in March 2007. Hong Kong has claimed the third place in all editions, except March 2009, when it was temporarily overtaken by Singapore. The Xinhua–Dow Jones International Financial Centres Development Index launched in July 2010 as a joint venture of the official press agency of the PRC and the New-York-based financial information company, places New York ahead of London, with Tokyo in the third and Hong Kong in the fourth place. It is not surprising that organisations from both London and New York are directly involved in these rating exercises.

A disadvantage of the GaWC and rating methodologies, however, is that they collapse differences in the position of individual centres into relatively small numerical differences, partly due to the fact that corporate networks are quantified with a simple coding from 1 for local offices to 5 for global headquarters. From the GaWC, it may seem that Hong Kong needs to improve only a tiny bit for it to challenge New York and London. Even Madrid in the 10th place, with 70 per cent of the financial network connectivity of London does not appear far behind. In GFCI, London has a rating of 775, while Luxembourg ranked 21st has a rating of 630, only 7 points behind Paris. Xinhua–Dow Jones gives New York a score of 88.4, while Copenhagen ranking 20th has a score of 41.0. Rating methodologies intentionally focus on the competitiveness of financial centres rather than their size and use measures of market sentiment, based on surveys among practitioners, as an important input into ratings. This allows a significant degree of change in ratings and rankings over time. An enthusiast may praise this sensitivity to change in the landscape of financial centres, while a sceptic may see it as an attempt to feed the media’s hunger for news. An opponent may say that it is an expression of financial-sector interests, as it suggests that the position of financial centres is fragile and may need to be protected—for example, by permissive regulation. Our argument is that these ratings underestimate the dominance of New York and London in global finance and consequently underplay the role of the axis.

To quantify the role of New York and London in global finance, we complement synthetic ratings and connectivity measures with easier to interpret figures on financial flows and stocks managed and controlled by these cities: foreign exchange turnover, interest rate derivatives turnover, stock of external bank assets, stock trading value, as well as data on employment. The first four items cover key financial markets, while employment represents the ultimate stock of financial centres, crucial to the operation of localisation and agglomeration economies and, through salaries and tax revenues, for the impact of financial centre on the urban economy. To be sure, all data except for employment are available for countries only. Nevertheless, existing studies suggest that the level of concentration of the selected financial activities in New York (for the US) and particularly in London (for the UK) is very high (Parr and Budd, 2000).

As Figure 1 shows, the Anglo-American share in global finance in 2010 was 32 per cent for cross-border bank assets, 53 per cent for stock trading, 55 per cent for forex and 71 per cent for interest rate derivatives. The figure also shows the share of the largest market other than the US and the UK. Only in case of stock trading, do the UK and the US not claim the two top spots. If one considered trading in foreign (cross-listed) stocks only, the share of the UK and the US would, however, exceed 80 per cent (Wójcik, 2011). The position of the axis indicated by the figure is formidable. The figures shown are national, but given that international financial activities are likely to be more dispersed in Germany and China than in the US, and are at least as concentrated in the UK as in Japan and France, the figure is a useful proxy of the relative position of the axis vis-à-vis foreign financial centres.

Figure 1.

Shares of leading countries in selected global financial activities.

The Anglo-American share fluctuates over time, but the prevailing trend since 1995 is an increase. The only exception is stock trading, explained by the expansion of domestic stock markets in emerging economies. For forex, interest rate derivatives and external bank assets, the joint UK and US share in 2010 was higher than before the crisis. Thus, the often-expected decline of Anglo-American financial power is at the very least exaggerated. The figure also illustrates important generic features of the axis. Its relative strength lies in securities (including stocks and derivatives) and trading (including securities and currencies), rather than traditional bank assets such as loans.

The focus of the axis on securities is confirmed by Table 1, presenting data on financial-sector employment in the leading centres of countries covered in Figure 1. Tokyo, Paris and leading Chinese centres may have comparable numbers of people employed in credit and insurance, but employment in the securities industry in these cities lags far behind New York and London. Even Boston and Chicago employ more people in the securities industry than Paris, while the industry is miniscule in Beijing, Shanghai and Frankfurt. The securities industry involves the production, distribution and exchange of securities. It consists primarily of investment banking and asset management, and constitutes the élite of the financial sector, with remuneration far exceeding that in credit and insurance or any other producer services (Wójcik, 2012a). Between 1998 and 2008, financial firms shed jobs in credit and insurance in New York and London, but compensated for that with new (much more highly paid) jobs created in the securities industry.

Table 1.

The number of employees in the financial sector (in 1000s)

City	Securities industry		Credit and insurance
City	2008	1998	2008	1998
New York	262	217	375	414
London	123	80	209	234
Hong Kong	70	55	137	114
Boston	68	58	125	121
Tokyo	62	77	296	392
Chicago	62	43	212	224
Paris	34	26	263	276
Beijing	16	—	211	73
Shanghai	13	—	193	66
Frankfurt am Main	10	9	58	62

Notes: Cities are defined as: Hong Kong—SAR; Beijing, Shanghai—municipality; Paris—Ile-de-France; Frankfurt am Main—Stadt; Tokyo—Prefecture (Tokyo-to); London—Greater London; New York—New York–Northern Jersey–Long Island Metropolitan Statistical Area (MSA); Boston—Boston–Cambridge–Quincy MSA; Chicago—Chicago–Naperville–Joliet MSA. Data for Germany are for 1999 and 2008; Japan, 1996 and 2006; otherwise for 1998 and 2008. The definitions of securities industry and credit and insurance industry are not fully comparable between countries.

Sources: National Bureau of Statistics of China; Unistatis (France); Bundesagentur für Arbeit Statistik (Germany); Japanese Statistics Bureau; NOMIS, Office for National Statistics (UK); County Business Patterns, US Census Bureau.

5. Conclusions and Implications

The objectives of the paper were to: highlight the relations between New York and London as financial centres; explore the role of these relations in the global financial crisis; and shed light on the possible impact of the crisis on the position of the two centres in global finance. A historical analysis of relations between New York and London recast the issue of interactions between financial centres in terms of commonalities and complementarities. It argues that the degree of commonality, complementarity and connectivity between the two leading global financial centres justifies the use of the term ‘the New York–London axis’. A review of emerging literature on the global financial crisis illustrates that, to a significant extent, the crisis originated in the axis. New York and London were the hotspots of irrational exuberance in the housing markets, the decision-making centres for the shadow banking system and the leading sources of financial deregulation. Data on financial stocks, flows and employment show that the joint dominance of New York and London in global finance must not be underestimated. New York and London still have no serious challengers in terms of financial assets and transactions controlled from them.

These findings have implications for literature and policy. First, when we acknowledge the role of the New York–London axis, we can view the rise of Asian financial centres as a choice between or a combination of two options: joining the axis or challenging the axis. The GaWC research shows that after NY–LON the most important connections are those of London with Hong Kong and New York with Hong Kong (Taylor et al., 2011). The tri-city of NY–LON–KONG would connect the leading English-speaking business centres in each eight-hour time zone. An alternative is a growing connectivity between NY–LON and the triad of Beijing, Shanghai and Hong Kong, the latter connected through strong complementarities, focusing on political, commercial and offshore financial functions respectively (Lai, 2012). There are, however, limits to the NY–LON–KONG scenario or relationships between NY–LON and the Chinese triad. Although potential complementarities are enormous, the commonalities between NY–LON and Hong Kong (not to mention Shanghai and Beijing) are small compared with those between New York and London. The Chinese authorities may not wish any of its leading urban centres to be an extension of the New York–London axis. The UK and the US have benefited in terms of international influence from underwriting the leading financial centres of the world, and probably in terms of growth, but definitely not in terms of economic stability and equity, which seem to be relatively high on the agenda in Beijing.

Secondly, in financial geography we need to revisit the issue of agency in relation to financial centres. According to the GaWC approach, the main agents are international producer services firms; cities themselves have little if any direct agency (Taylor, 2004). The evidence on the role of the axis in the global financial crisis, however, indicates that the agency of regulatory bodies and industrial lobbying associations, which function in particular places and are plugged into key spatial networks, can be crucial. In this respect, future research should consider for example the power of the City of London Corporation or securities industry lobby groups, such as the London Investment Banking Association, the SIFMA in the US and the International Securities Dealers Association with main offices in New York and London.

The third implication concerns the mobility of firms and professionals in finance. Global finance depends a great deal on people and infrastructure in New York and London, and the argument that bankers working in these centres can pack their coffers and move elsewhere en masse is self-serving and exaggerated. As Allen argued, “the networks of international finance have little choice other than go through its financial district for certain types of trading and dealing” (Allen, 2010, p. 2898). Insiders themselves admit that “only the most swingeing regulation would outweigh the City’s agglomeration and time-zone benefits” (Guthrie, 2011, p. 20). It is instructive to see that the main arguments used to stress the mobility of finance in early 2011 in London are thinly veiled threats from the HSBC to move its headquarters to Hong Kong, and from Barclays (now with an American CEO) to move to New York. For an international financial firm to give up its presence in the axis (particularly if extended by Hong Kong) is a difficult proposition. Consequently, banning undesirable and promoting desirable financial practices in the US and the UK can achieve more than the opponents of financial reform want us to believe. The authorities of the states and cities hosting financial centres, with the US and the UK governments in the lead, can use the difficulty of obtaining an international, if not global, agreement for regulatory change in finance as an excuse for inadequate action. Global finance starts on Wall Street and in the City of London, and global financial reform has to recognise this.

Ultimately at stake is the reform of the global financial system. Existing reform plans show little consideration for the role of financial centres and no recognition of the New York–London connection. The Financial Crisis Inquiry Report in the US talks about Wall Street on almost every single page, but mentions London only in the context of AIG FP. The reports of the House of Commons Commission on the banking crisis use the City in their titles, but hardly mention Wall Street or the US. The Financial Stability Board hosted by BIS, the Global financial stability report of the IMF (2010) and the communications of the European Commission on financial services or supervision policy do not mention the word financial centre, London, New York, the City or Wall Street. In my view, for global finance to change, a significant degree of change must be generated internally within the financial sector and, given the concentration of key personnel, expertise, knowledge, transactions and power of global finance in New York and London, the axis should also be considered in the on-going debates. Wall Street and the City represent communities that jointly bear significant responsibility for what has happened and what will happen in global finance. As The Financial Times put it “What is now urgently needed is some moral authority from the government and also the financial sector” (Fried, 2011).

Footnotes

Funding

This research received no specific grant from any funding agency in the public, commercial or not-for-profit sectors.

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