Hierarchical tendencies,functional specializations,and (in)stability across European banking centers

Abstract

Drawing on conceptual research exploring how evolving geographies of finance inform urban and regional change, we examine the size and functional scope of the presence of leading global banks across functional urban areas in Europe. Based on data for 100 major global banks, we find that their overall presence is proportional to (the square root of) the national gross domestic product. London and Luxembourg host far more banks than can be explained by their national gross domestic product, which can be traced back to their export of banking services. We also analyze the geographies of specialized banking services per city. Corporate and investment banking are mainly explained by national gross domestic product, with London emerging as the most prominent center. Private banking and securities services, in turn, are largely independent of national gross domestic product and rely on the importance of small and specialized economies such as Luxembourg and St Helier (Jersey). The stability of Europe’s banking centers is underpinned by their role as the national banking center and/or their specialization in international banking services, as well as manifested in specialized subnetworks of financial centers.

Keywords

Banking centers Europe financial centers London Luxembourg

Introduction

International financial centers (IFCs) play an increasingly strategic role in the world economy. As Haberly and Wójcik (2022) and Wójcik et al. (2022) recently pointed out, IFCs are at the center of myriad global financial flows. Coe et al. (2014) proposed a more general conceptual framework for understanding the geographies of finance and identifying interlocking actors, places, and networks that underpin the global financial system. Formally identifying and classifying this variety has helped (re)integrate financial geography research into the literature on urban and regional change. Building on an interdisciplinary body of ideas, Coe et al. (2014) proposed four key building blocks to understand how the changing world of finance unevenly impacts cities and regions: financial centers, financial and advanced business services, offshore jurisdictions, and world governments. While these and related conceptual debates are central to understanding how cities and regions compete, adapt, and coevolve in the world of finance, a thorough empirical understanding of this nexus remains equally crucial. The general objective of this article is to contribute to this fast-evolving literature by means of an empirical analysis of the nexus between the first two of these building blocks at the scale of European cities, that is, the intersecting geographies of financial centers and financial business services.

In practice, our focus will be on a specific type of finance: banking. We believe this focus is pertinent in light of the—in our view erroneous—observation that banking in general and European banks, in particular, seem to be caught in a structural crisis. Since the Global Financial Crisis of 2008, European banks struggled to cope with low and at times even negative interest rates, bad loans, the alleged “burden” of regulation, and new technologies. The COVID-19 pandemic exacerbated some of these problems, initially sending European bank stocks to 30-year lows (Easton, 2020). On a more fundamental level, it has been argued that banks may become irrelevant in an era of fintech and cryptocurrency (Schich, 2019). As a corollary, the focus of much research on finance has shifted from commercial banks (Grossman and Woll, 2014) to the power of central banks (Braun, 2020), asset managers (Dixon and Monk, 2012; Petry et al., 2019), and financial market infrastructure (Robinson et al., 2022). However, our starting point here is that amid these changes, the banking industry remains a crucial part of the European economy. Despite ongoing changes in the structure of the banking sector, its relative importance in terms of employment, access to financing, and contribution to GDP are echoed in its direct (banking employment), indirect (business to related (para-)financial sectors), and induced (access to loans and credit, thus, plumbing the real economy) effects. At the end of 2020, banks had more than 11.6 trillion euro outstanding loans to euro area nonbank residents (European Central Bank (ECB), 2020a). Although the number of people working in the banking sector has been slowly shrinking for years, about one in every 100 jobs in Europe remains a banking job, with the European banking sector still employing more than 2.7 million people in 2020 (including EFTA countries; see European Banking Federation (EBF; 2021). Banks process payments, finance, and manage investments, provide specialized financial and payment services but also do much trading on their own behalf. Central banks depend on commercial banks to transmit monetary policy to the “real” economy (Braun, 2020; Chatelain et al., 2003). Using the COVID crisis as an example, Flögel and Gärtner (2020) showed that German regional savings banks (Hausbanks) were able to grant loans quickly and unbureaucratically to their long-standing customers and thus support regional economies (cf. Werner, 2013). And finally, there continue to be developments in what is often seen to be part more “classical” types of banking. Hall (2021), for example, recently detailed how the London banking sector has been further strengthened by becoming the leading Western center within the wider Chinese economic and political project of internationalizing the renminbi (RMB), while Luxembourg hosts the largest headquarters of Chinese banks that design fund structures for RMB investments in BRI (Belt and Road Initiative) countries and is a major center for listing RMB-denominated bonds (Balmas and Dörry, 2022). The first more concrete objective purpose of this article, therefore, is to examine the size of the presence of leading global banks across functional urban areas (FUA) in Europe.

A mere focus on “the banking sector” may obscure the enormous diversity of the industry. Banks diverge in size, form, and role. Banks’ balance sheets range from a couple of million euros to several trillion euros. Commercial banks can be owned by institutional and retail investors, cooperative shareholders, or states (Véron, 2017). Importantly in the context of this article, the various dimensions of this diversity have different geographical components. “Banking centers,” a specific subset of the more encompassing concept of “financial centers” (Cassis and Wójcik, 2018; Dörry, 2016b; Gál, 2015; Wójcik et al., 2018), unevenly enact a broad range of functions and thereby unevenly combine several types of markets. Tschoegl (2000) argued that the complex nexus between banking institution and banking center diversity can be captured by considering four aspects: client, arena, product, and position in the value chain. This implies that an understanding of the urban geography of banking centers ideally requires an analysis of four interlocking dimensions: the types of client a bank is serving, where clients are located or come from, what type of product the institution is delivering to these clients, and which parts of the production process for a particular banking product are taking place across different locations. More recently, however, we have seen the development of functional niche markets that reflect a complex mosaic of structured relations that have their roots in overlapping processes of geopolitical and geoeconomic change, geographies of regulation, infrastructure networks, and evolving product categories and value chains. The second concrete objective of this article, therefore, is to examine the functional diversity of banking across functional urban areas (FUA) in Europe.

Geographers have studied individual European financial and banking centers, including Amsterdam (Engelen, 2007), Budapest (Gál, 2015), Frankfurt (Grote, 2008), London (Faulconbridge, 2004), Luxembourg (Dörry, 2016b), and Munich and Vienna (Zademach and Musil, 2014). In these studies, authors position the evolution of banking activities in a city into a historical context, with a rich description of the financial industry revolving around banks, insurers, stock exchanges, and other financial institutions. Although scholars have thus produced an extensive body of knowledge on European banking centers, the distribution of banks and banking specialization across cities merits further study. Some studies have looked at the evolution of banking centers based on financial metrics (Blažek and Hejnová, 2020; Derudder et al., 2011), while others focus on a single specialization such as investment banking (Gemici and Lai, 2019; Wójcik et al., 2018). Here, we use an analysis of the size and functional scope of the presence of leading global banks across European cities to reflect on the different roles cities play in an integrating European banking sector.¹

The remainder of this article is organized as follows. First, we position our research on European banking centers in the context of the blossoming literature on financial geography. Second, we discuss how this informs our understanding of key structuring processes and possible typologies in the European system of banking centers. Third, we describe our data and methodology, followed by an overview and subsequently a discussion of European banking centers based on an assessment of the number of large banks registered in a city as well as their roles by discussing different types of services they offer. In the final section, we provide an overview of our main findings and discuss possible avenues for further research.

Financial geography in/and urban and regional studies

Over a decade ago, Lee et al. (2009) observed that financial geography was fast becoming an increasingly vibrant field of study. The global financial crisis and its uneven geographical impacts had clearly shown that financial institutions and markets were central to the entangled geographies of contemporary economic, cultural, urban, and political life. Since then, building on earlier research on the spatial structures of the international financial system and the financial industry, financial geography has continued to thrive, developing in myriad new conceptual, analytical, and empirical directions (for a recent overview, see Aalbers, 2018, 2019, 2020) These new directions sometimes involve elaborating entirely novel conceptual frameworks and exploring the limits thereof, as is the case in the literature on financialization (e.g. Christopers, 2015). Nonetheless, financial geography researchers also continue to make connections with other research areas in geography in general, and urban and regional studies in particular (Sigler et al., 2020). For example, the vibrant literature on global financial networks has shed new light on the role of finance in regional development (Coe et al., 2014) and pushed the boundaries of research into IFCs as strategic basing points for global capital.

Although much of this growing IFC literature concentrates on mainstream financial products circulating in and through Anglo-American economies, there is also a growing body of research on new sources and forms of international finance such as Islamic finance (Lai and Samers, 2017), the offshoring of RMB (Hall, 2021), and cryptocurrencies (Zook and McCanless, 2022). One recurring finding in analyses of IFCs is that, despite new financial processes, products, and developments, and despite cities such as Dubai and Shanghai emerging on the global map of IFCs, there is much path dependence. Bassens et al. (2010), for example, find that London plays a central in the corporate networks of Islamic financial services firms, while Töpfer and Hall (2018) and Hall (2021) detail London’s development as the first Western offshore RMB center. And finally, Estorick (2021) discusses how the explosion of interest in crypto art—that is, art turned into tokens on a blockchain—as an asset class and as a global cultural trend is once again reinforcing the position of London as an IFC: he points out that London’s role is less a site of exchange compared to New York or Silicon Valley than an engine of cultural creation, validation, and innovation (for a critical take on financial innovation, see further Dörry, 2022). This path dependency extends to the infrastructural architecture of global finance. For example, even though correspondent banking (since 1973 together with the Society for Worldwide Interbank Financial Telecommunication (SWIFT)), a key element of this financial market infrastructure, is sensitive to geopolitical upheavals as shown by the recent decoupling of (most) Russian banks, it has been functioning in broadly the same way for more than 500 years (Robinson et al., 2022). Against this background of a shifting, yet path-dependent landscape of finance, in this article, we seek to contribute to our understanding of the European urban geography of some of these more traditional financial players: we discuss the geography of European cities as banking centers.

European cities as banking centers: processes and typologies

Bank locations are, of course, characterized by dispersed geographies that have complex yet direct relations with settlement systems at various scales. This implies that many banking activities take place and shape outside of the banking centers that are the focus of this article. However, many of these activities involve frequent routine, standardized, and small-scale transactions, while the banking activities that make cities into banking centers primarily involve innovative, customized, and large-scale transactions. Of course, the difference is rarely clear-cut, and to identify and compare banking centers, one needs to properly operationalize and measure this distinction.

Previous studies have quantified banking centers using different metrics. Derudder et al. (2011) used the Tier 1 capital of banks to assess the banking center landscape, while Blažek et al. (2020) compared European banking centers by the total assets of banks present in those cities. Wójcik et al. (2018) looked at the cross-border fees of investment banks, while Zademach and Musil (2014) investigated the locations of the 30 most important European banks and their subsidiaries. In its biannual Global Financial Centers Index (GFCI), Z/Yen (2020) ranked cities according to a somewhat obscure model that combines instrumental “competitiveness factors” and responses to online questionnaires. Table 1 gives an overview of major European banking centers according to total assets (Blažek et al., 2020), cross-border investment banking fees (Wójcik et al., 2018), and the GFCI (Z/Yen, 2020). Although all three approaches identify London, Paris, and Frankfurt as leading European banking centers, there is sizable divergence beyond these cities. Nonetheless, Table 1 allows us to discern a number of critical building blocks for analyzing the urban geographies of banking in Europe. We discuss two of these building blocks in turn: (1) the processes shaping European cities’ positions and roles, and, drawing on this and (2) a typology of banking centers.

Table 1.

Ranking of the European banking centers according to total assets in 2015 (Blažek et al., 2020), cross-border investment banking fees between 2000 and 2014 (Wójcik et al., 2018), and the 2019 GFCI banking subindex (Z/Yen, 2020).

	Total assets	Cross-border IB fees	GFCI banking subindex
1	London, Paris	London	London
2	-	Zurich	Geneva
3	Frankfurt	Frankfurt	Paris
4	Zurich	Paris	Frankfurt
5	Madrid, Stockholm	Amsterdam	-
6	-	Edinburgh	-
7	Edinburgh	Stockholm	-
8	Amsterdam, Milan	Milan	-
9	-	Brussels	-
10	Bilbao, Brussels, Copenhagen, Turin, Utrecht	Oslo	-

GFCI: global financial centers index.

First, the geographies contained within Table 1 are the result of a complex mosaic of structured relations and patterns. The first of these is that the size of national economies appears to play an important role in the ranking. The three most important banking centers (Frankfurt, London, and Paris) are located in Europe’s largest national economies (Germany, the United Kingdom, and France), while Milan as Italy’s leading national banking center also features in the top 10 for total assets and cross-border investment banking fees. Second, economic specialization matters, both in terms of the relative importance of finance within the economy and in terms of specialization within finance. An obvious example of the former is the presence of Swiss cities, while an example of the latter is the absence of Geneva in the ranking based on banks’ total assets and cross-border investment banking fees even though it features prominently in the GFCI model. Third, in countries with a more polycentric urban system, the major banking center is somewhat less prominent: the contrast between a more primate France/England versus a more polycentric Germany/Italy is a case in point here. This obviously echoes the long-standing debates in urban and regional studies on urban primacy, debates that have recently been revived in the study of IFCs by Ioannou and Wójcik (2021) who demonstrate that urban primacy is related positively to the size of financial activity. Fourth, there are several idiosyncratic patterns, for example, shown by the presence of Bilbao in the asset-based ranking. Bilbao’s appearance in this ranking can be traced back to the origins and the continued presence of BBVA, the second-largest Spanish bank in terms of total assets that have a “dual-headquarter” shared between Madrid and Bilbao. At the same time, there are also interesting omissions, including Vienna even though it has previously been identified as a crucial financial gateway between “Western” Europe and “Central and Eastern Europe” after 1989 (Musil, 2009; Resch and Stiefel, 2011).

Second, such comprehensive rankings may disguise that different cities perform different roles in the banking sector, which may in turn lead to typologies of banking centers. For example, London’s wholesale global city centrality (Taylor and Derudder, 2022) goes hand in hand with a prominent role in a range of specialized banking services. Hall (2017, 2021) described the development of offshore RMB markets in its financial district. Van Meeteren and Bassens (2016) discussed the role of London’s investment banks and related knowledge-intensive business services (KIBS) firms in the issuance of Eurobonds, while Beaverstock et al. (2013) documented how private bankers based in London service the super-rich. Building on these insights, scholars discussed post-Brexit dynamics and scenarios for London’s banking and financial center thereby addressing aspects of financial specialization and decreasing critical mass of financial functions (Dörry and Dymski, 2021; Heneghan and Hall, 2021; Lavery et al., 2018). However, there has been much less research on such specialized roles of European cities (for Luxembourg, see Dörry, 2016b; Majerus and Zenner, 2020; Walther et al., 2011; for Polish financial centers, see Hashimoto et al., 2021; Hashimoto and Wójcik, 2021), a gap our analyses seek to help fill. Of note is also the relatively small body of research into the factors that influence cities’ role as banking centers. Wójcik et al. (2018) found that investment banks tend to be clustered in the financial centers of countries with a large domestic market, with factors such as corporate and financial taxes having no major effect on the location of investment banks. Bouvatier et al. (2017) showed that there are more banks in small tax havens than would be expected by a gravity model based on gross domestic product (GDP) and distance.

Drawing on Walter (1988), Tschoegl (2000) proposed a typology of banking centers based on four dimensions: client, arena, product, and position in products’ value chains. This implies that a typology of banking centers requires an analysis of the types of client a bank is serving, where clients are located or come from, and what type of product the institution is delivering to these clients. These dimensions and the ensuing typology are, in turn, shaped by geopolitics, geographies of regulation, infrastructure networks, and value chains. More than three decades ago, Amin and Thrift (1992) already pointed out that different parts of the production process for a particular banking product were taking place in different locations, with cities increasingly becoming localized complexes embedded within global value chains. The latter dimension has become increasingly relevant for geographers in particular because corporate strategies in the banking sector not only entail a product-market configuration but increasingly also a production configuration. More generally, however, we have seen the development of niche markets.

For a long time, services in general and banking in particular predominantly took place simultaneously and in close geographical proximity contact with consumption. The very existence of offshore financial centers, which are often purely booking centers, obviously attests this is no longer the case; for example, private banking depends on favorable regulations with regard to tax treatment and secrecy, such as the Isle of Man targeting high net worth individuals seeking to “mitigate” UK taxes. Meanwhile, some centers may appear to be on the map of banking and finance even though their role is one of a dependent articulation into global financial networks, such as Manila’s back office function in many service markets (Kleibert, 2017). Collectively, these different, even if sometimes overlapping dimensions of international banking centers, have led to the first attempts to compile fully fledged typologies. For example, Wójcik et al. (2019, 2022) recently devised typologies by using data on actual financial transactions conducted out of cities to distinguish between the nationality of providers and clients.

Data and methods

Official lists of banks active in the European Union (EU), the United Kingdom, Switzerland, Norway, and the Channel Islands of Guernsey and Jersey at the end of 2019 were downloaded from the websites of the ECB (2020b, c), the Bank of England (BoE) (2020), the Swiss National Bank (SNB, 2020), the Norwegian Finanstilsynet (2020), the Guernsey Financial Services Commission (GFSC, 2020), and the Jersey Financial Services Commission (2020). Based on an overview by The Banks.eu (2020), we did not include banks in other European jurisdictions such as Andorra, Iceland, the Isle of Man, Liechtenstein, or the non-EU countries of the Western Balkans because today few or no large international banks are active in these places (cf. Derudder et al., 2011). In addition to the 27 EU countries, the ECB data also include banks in Monaco. We restricted the data to commercial banks that hold a banking license. Banks that only have a representative office and are therefore not allowed to accept clients’ deposits, were excluded.

The data from the ECB and the SNB include the location of the banks. For the sake of consistency, we allocated banks to FUA as defined by Eurostat (2020). This needs to be considered as we discuss results, because this may account for some of the differences with other studies. Most notably, the FUA of Luxembourg covers the entire country, while research by, for example, Blažek et al. (2020) adopted a territorially narrower conception of Luxembourg City. The BoE does not provide information on the location of banks registered in the United Kingdom, and we therefore had to look this up on the banks’ websites. To identify banking centers, we counted the number of registered banks per city. Focusing on the mere number of banks has at least two drawbacks. First, it does not consider the internal organization of banks. For example, Groupe BPCE has 23 entities with a separate banking license in Paris. On the other hand, Deutsche Bank only has two banking entities in Frankfurt. To avoid distortions caused by banks’ internal organization, we consolidated banks that are part of the same group.

Second, this approach does not consider the size of banks. The size of a banking center can be inflated by the presence of many independent small banks. For example, of the 115 banks in Dublin, 59 are local credit unions. Only focusing on the (consolidated) banks that belong to one of the world’s 100 largest commercial banking groups as identified by S&P Global (2020) allows us to single out those banking centers that have a significance that straddles national borders.

That said, a straightforward metric such as the number of largest banks has its advantages. For example, Graves (2001) showed that despite its high level of banking assets, Charlotte (North Carolina, USA) did not have a high share of financial sector employment. Meanwhile, aggregated assets of banks in a city do not clarify the sectoral nature of these assets. For example, Luxembourg has total banking assets similar to Norway and Austria (Cernov and Urbano, 2018), but the assets in the latter countries are mainly based on generic activities of universal and savings banks, while in Luxembourg, the majority of assets belong to specialized foreign custodian banks. Therefore, in addition to counting the number of banks, we singled out their core specialization, for which we used the banks’ websites. To this end, we draw on Cernov and Urbano (2018), who proposed a typology of bank business models based on their main activities, funding, and ownership structure. Alongside universal banks that engage in retail, corporate, and investment banking, we distinguish between (1) corporate banking, (2) investment banking, (3) private banking, and (4) securities services.

Table 2 shows typical examples of services provided by these banks, as well as their clients. Each of these four specialized groups will be empirically examined alongside the geography of banking at large.

Table 2.

Four types of banks covered with a selection of their typical services and clients (based on Cernov and Urbano, 2018).

Type	Services	Clients
Corporate banking	Trade finance, cash management	Large corporates
Investment banking	Access to capital markets, mergers, and acquisitions	Large corporates, governments, and institutional investors
Private banking	Asset management and financial advice	High-net-worth individuals
Securities services	Custody and clearing	Institutional investors

Results and discussion

Geographies of international banking—general

We divide the discussion of our results into two main sections. We begin by examining the geography of banking centers-at-large, followed by an analysis of specialization across the different types of banks.

Figure 1 maps the 28 European cities that host at least five of the 100 largest banks, with the size of the circles proportional to the number of banks. London, Frankfurt, and Paris host 75, 47, and 45 of the banking groups, respectively, while Luxembourg, Milan, Amsterdam, Madrid, and Dublin each host more than 25 of the 100 largest banks. Of the 33 European countries in our data set, 24 countries have a banking center by this definition, while Switzerland (Geneva, Zurich) and Germany (Frankfurt, Düsseldorf) both have two. In contrast, there are no banking centers in Croatia, Cyprus, Estonia, Latvia, Lithuania, Malta, or Slovenia; in other words, only smaller national economies like the Baltic states or the Mediterranean island nations do not have a banking center according to our operational definition.

Figure 1.

European FUAs with five or more top 100 banks. The size of the circles is proportional to the number of banks. The colors show the residuals relative to a trendline between the number of banks and GDP derived from Figure 2.

Despite the epithet international banking centers, Figure 1 corroborates the hypothesis developed based on Table 2 that there remains a clear and obvious relation between bank presences and the size and nature of national economies. The most obvious starting point to further specify this relation is by linking the number of banks in banking centers to the GDP of their host country. The inset in Figure 2 plots the number of banks in banking centers in the function of GDP. While the number of banks in centers does indeed increase with GDP, the relationship is not linear. For example, in countries with an annual GDP above USD 1000 billion, the number of banks no longer follows the trend of the smaller economies. Figure 2 therefore plots the number of banks in banking centers² against the square root of GDP, confirming the strong relationship with an R² of 0.67. Importantly, this shows that the relationship is strong but far from perfect. The standardized residuals from the trendline in Figure 2 allow exploring these exceptions, and are used in Figure 1 to show which cities have more/less banks than expected based on GDP through a dual color code: greenish shades suggest more banks than expected and reddish shades less banks than expected; the darker the shade, the more pronounced the pattern.

Figure 2.

Number of global top 100 banks in banking centers as a function of the square root of GDP. The insert plots the same data but with GDP.

Before turning to the discussion of these residuals, it is useful to point out that national economies and their urban systems also impact the geographies of international banking centers in other ways. For example, our findings also confirm Ioannou and Wójcik’s (2021) observation that (the lack of) urban primacy impacts these geographies. The presence of multiple centers in Germany and Switzerland, for example, reflects the long-standing polycentric patterns of their urban systems. In the case of Germany, Berlin lost its position as Germany’s leading banking center after the Second World War, when Frankfurt emerged as the largest German banking center (Grote, 2008). However, this geographical concentration has not advanced as much as in the United Kingdom or France, and Germany still has lower-tier banking centers with Düsseldorf, Hamburg, and Munich, with four of the top 100 banks present in the latter two cities (not shown on the maps due to the cutoff at five large banks per city).

The residuals show that Luxembourg and London clearly stand out in that they host many more banks than expected: they are “true” international banking centers in that they are used as platforms for providing banking services well beyond their national borders. For example, the United Kingdom exported USD 80 billion worth of financial services in 2019, while Luxembourg exported USD 63 billion (UNCTADstat, 2020). These numbers dwarf those for other countries, with Germany as the third-largest European exporter of financial services with USD 26 billion. As a caveat, UNCTAD defines financial services as “financial intermediary and auxiliary services, except insurance and pension fund services. These services include those usually provided by banks and other financial corporations.” Nonbank financial institutions such as Luxembourg’s specialized services to the fund management industry (Dörry, 2016a) therefore also contribute to its financial services exports.

Figure 1 suggests the presence of a geographic pattern in the residuals. Out of 13 Western European banking centers, nine have positive residuals. In contrast, 14 of the 15 banking centers in Northern, Southern, and Central and Eastern Europe have negative residuals—only Prague does not have a negative residual. To explain this geographical pattern, we will link it to patterns of roles and specialization, discussed in the next section.

Geographies of international banking—roles and configurations

Figure 3 disaggregates this general pattern, allowing us to identify different roles and configurations. The figure again shows the relation between (the square root of) GDP and the number of banks, but now for the four types of banks separately. The first thing to note is that there is a difference between, on the one hand, corporate banking (R² = .79) and investment banking (R² = .85), where the strong relationship is confirmed, and, on the other hand, private banking (R² = .19) and securities services (R² = .06), where this relationship is weak or even as good as absent. Figure 4, in turn, maps the geographies of these four sectors along similar lines as Figure 1.

Figure 3.

Number of global top 100 banks, per sector, as a function of the square root of GDP (a) number of large corporate banks in banking center, (b) number of large investment banks in banking center, (c) number of large private banks in banking center, and (d) number of large securities services banks in banking center.

Figure 4.

Geography of European banking centers for different kinds of banking services (a—corporate banking; b—investment banking; c—private banking; d—securities). Maps are constructed as set out in Figure 1.

London hosts the largest number of corporate banks, followed by Paris, Frankfurt, Milan, and Amsterdam. Meanwhile, London and Luxembourg have the largest positive residuals, while Milan and Madrid have the largest negative residuals. London also hosts the largest number of investment banks, followed by Paris, Frankfurt, Milan, and Madrid. Meanwhile, London, Luxembourg, and Zurich have the largest residuals, Warsaw the lowest residual. Central and Eastern European (CEE) banking centers in general have fewer investment banks compared to the rest of Europe. London hosts the largest number of private banks, followed by Luxembourg, Paris, Madrid, and St Helier. Cities with positive residuals are clustered in Western Europe. In contrast, CEE centers have very few private banks (cf. Sokol, 2017). And finally, Luxembourg hosts the largest number of banks with securities services, followed by Dublin, Frankfurt, St Helier, and London. The cities with the largest residuals are Luxembourg, Dublin, and St Helier.

As shown in Figure 3, the association between the size of banking centers and (the square root of) GDP is strongest for large corporate and investment banks. One possible explanation for the deviation from the trendline for corporate banks can be linked to countries’ exports of goods and services (The World Bank, 2021), as shown in Figure 5. Except for London, all cities with positive corporate bank residuals are in countries where exports are over 70% of GDP (The World Bank does not report data for Guernsey, Jersey, or Monaco). Meanwhile, 15 of the 17 cities with negative residuals are located in countries where exports are less than 60% of GDP. A higher level of international trade thus creates more demand for corporate banking services such as trade finance and international payments. However, an alternative or perhaps complementary interpretation might be the exports themselves are above all reflecting a different mode of integration of these countries into the global economy, as also shown by the different number of headquarters of multinational enterprises between Western and Eastern Europe (Bel and Fageda, 2008).

Figure 5.

Residual of the trendline in Figure 2 as a function of exports to GDP.

There is no obvious factor explaining the residuals of investment banking centers in Figures 3 and 4. Although Paris and Frankfurt rank 3rd and 4th for cross-border fees (Table 1), they have negative residuals. Comparing the residuals for corporate and investment banks suggests a difference between the larger CEE centers and the rest of Europe. In Prague, Warsaw, and Budapest, there are fewer investment banks; Frankfurt, Milan, Madrid, Zurich, Stockholm, Copenhagen, and Oslo have relatively more investment banks. The countries of the latter group of cities have larger capital markets due to more need to finance corporations on the international capital markets—and therefore deals for investment banks—than CEE does. The positive residual of Luxembourg is likely due to its long-standing specialization in the issuance and listing of international bonds (Luxembourg Stock Exchange, 2021).

London’s larger number of investment banks compared to Paris or Frankfurt requires further explaining, as the United Kingdom’s GDP is similar in size to France’s and smaller than Germany’s. A key element is that banks in London intermediate currency and corporate transactions between the Americas, Asia, and Europe, and London also provides banking services not found in continental markets (Clark, 2002). For example, roughly half of the world’s over-the-counter interest rate derivatives trading happens in London, as does almost half of foreign exchange trading (Dörry, 2017; Goodacre and Razak, 2019). These deep, liquid markets attract corporate and investment banks (CIBs) from all over the world. Several major American, Asian, and Australian investment banks in London do not operate elsewhere in Europe.

Figure 3 suggests that the number of global top 100 banks offering private banking services is only weakly related to GDP. The high residuals of Luxembourg, London, Zurich, and Geneva indicate that private banks in those cities also serve foreign clients. The same observation applies to the offshore financial centers of Jersey, Guernsey, and Monaco. Foreigners are attracted to these offshore jurisdictions (Beaverstock et al., 2013) by their reputation for political stability, predictability of legal decisions, tax stability, and client confidentiality (KPMG, 2012). Luxembourg has long been mainly focusing on European private banking clients (Radu, 2014), but this is changing rapidly as it is actively welcoming non-European clients along with the co-evolution of its internationalized asset management industry. Currently, only 10% of the top 100 private banks in Luxembourg are non-European. In contrast, the fraction of non-European top 100 private banks is 50% in Zurich, 43% in London, 20% in Geneva, 18% in St Helier (Jersey), and 14% in St Peter Port (Guernsey). European banks prefer certain private banking centers based on their nationality, but also on a shared language and culture that nurtures trust in the relationship between private bankers and wealthy clients. For example, four British top 100 banks have private banking subsidiaries on the Channel Islands, versus two in Switzerland and only one in Luxembourg. On the other hand, four French top 100 banks have private banking subsidiaries in Luxembourg, three in Switzerland, and only two on the Channel Islands.

London, Luxembourg, and the two Swiss centers combined have a similar number of top 100 private banks. However, that does not translate into a similar market share. In 2011, Luxembourg accounted for 6% of international private banking, versus 27% for Switzerland and 24% for the United Kingdom and its dependencies (Radu, 2014). Surprisingly, Frankfurt has a negative residual comparable to that of Sofia, although Germany has about 16 times as many millionaires per capita as Bulgaria (Credit Suisse, 2020).³ However, observations like this also expose a limitation of using the top 100 banks to study the geography of private banking centers.⁴ The data used in the present article do not include dedicated (often Swiss) private banks such as Pictet, Julius Bär, or Edmond de Rothschild. According to the full list of banks in Europe, specialist institutions make up a significant fraction of private banks in Western European cities. In Monaco, they outnumber the top 100 banks, while they are virtually absent from CEE.

Figure 3 shows that the number of global top 100 banks offering securities services is almost independent of GDP. This is because international investment funds are above all domiciled in specialized, often small countries like Ireland or Luxembourg. For Luxembourg, the world’s largest cross-border investment fund center (Dörry, 2016a) in 2019 investment funds assets equaled 78 times its GDP. In large countries like Germany, France, and the United Kingdom, domestic investment funds and stock exchanges also provide demand for securities services. The impact of non-top 100 banks on the relative size of the securities services centers is limited. There are only a handful of multinational securities service banks that are not part of the world’s largest banking groups, for example, Allfunds Bank, Northern Trust, and State Street Bank. However, this also suggests that the global asset management industry is embedded in highly specialized ecosystems, especially in the triangle of London, Luxembourg, and Dublin, which have not only undergone a process of consolidation during the past 15 years (Wójcik et al., 2021) but are also linked through financialization processes of global corporations themselves, which can be subsumed under the financial and business services at large (Derudder and Taylor, 2020). Almost three decades ago, O’Connell and Kennedy (1994) already reported that, as an IFC, Dublin’s role was one of concentration on “long-distance” services such as fund management, asset financing, treasury management, insurance and reinsurance activity, and provision of administrative and custodial services—typically banking services that do not always require close physical proximity to customers.

As previous research by Wójcik et al. (2018) and Bouvatier et al. (2017) showed, corporate and investment banking are more strongly correlated with GDP than with tax rates. Meanwhile, banks disproportionally offer private banking and securities services in tax-friendly jurisdictions. Nonetheless, low taxes are not sufficient for a city to become an international banking center. A Special Committee of the European Parliament (2019) identified seven EU countries that “display traits of a tax haven”: Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta, and The Netherlands. Only Luxembourg and Ireland have residuals above 4 in Figure 1, which suggests that their specialized banking industries are tightly embedded in fine-tuned regulatory frameworks, as also suggested by their disproportionally large number of accountancy and law firms and the structuration of their financial products (cf. Dörry, 2015, 2022). From this perspective, Luxembourg and Malta most clearly perform a role as offshore banking centers in that, as Aalbers (2018) pointed out, they are jurisdictions that provide banking services to nonresidents on a scale that is incommensurate with the size and financing of its domestic economy and host a highly specialized services industry that offers tailor-made solutions.

Conclusion

The main origins and consequences of spatial concentration in banking and finance are well documented, but they do not always allow the ability to sufficiently grasp the overlapping and complementing hierarchical tendencies, functional specializations, and (in)stabilities characterizing the urban and regional geographies of the sector. Spatial concentration in banking and finance can be traced back to a range of interacting and complementary processes. For example, the proximity of banks to their clients affects lending patterns (Degryse and Ongena, 2005; Flögel and Gärtner, 2020; Jackowicz et al., 2020), while the efficiency of banks is a function of their distance to financial centers (Degl’Innocenti et al., 2017). Furthermore, specialized knowledge—and knowledge workers—are geographically concentrated. Banks open offices in major centers so they can easily hire skilled staff, have access to local knowledge, deal with clients, and interact with other banks and KIBS firms (Jacobs et al., 2014). Banks are also attracted to places with “supportive” regulations and supervisors. Beyond political economy readings of banking centers, there is also the literature taking a social-constructivist approach, emphasizing that the territorial embeddedness of specific cities in the production and reproduction of finance is also explained by particular social and cultural constructions of people and places (Leyshon and Thrift, 1997).

However, banking centers are also varied in scale and scope and often defy straightforward typologies. The emergence of offshore banking and finance, which is a much broader category than tax havens (Aalbers, 2018), adds layers of complexity to our understanding of banking centers as investors use a broad range of specialized and often even tailored institutional arbitrage for specific types of services (Clark et al., 2015). To grasp this diversity, the financial geography literature has developed new conceptual frameworks to grasp the (1) geographies of finance, identifying the actors, places, and networks that underpin the global financial system (Dörry, 2022; Haberly, 2020), and (2) its impacting urban and regional change (Coe et al., 2014). In this article, we contribute to this literature by mapping and interpreting the configurations and roles of major banking centers in Europe through the lens of the presence of the world’s 100 largest banks. We find that most countries have a single banking center. For corporate and investment banking (and the banking sector at large), the number of banks is proportional to the square root of national GDP. London has a high residual of corporate investment banks, which is indicative of its export of corporate and investment banking services to the rest of the world. More generally, in countries with a high ratio of exports to GDP, banking centers host proportionally large numbers of corporate banks. Private banking and securities services are only weakly related to the size of the domestic economy. London, Luxembourg, St Helier (Jersey), and Geneva are key centers for private banking, while investment fund centers Luxembourg and Dublin have most banks offering securities services. The stability of Europe’s banking centers is underpinned by their role as the national banking centers and/or their specialization in international banking services.

Future work could apply the methodology in this paper to the world economy at large. Based on the literature, it is likely that cities such as Dubai and Singapore function as supranational banking centers. But it would be instructive to also study cities such as Jakarta, Lagos, Moscow, Sao Paulo, Seoul, and Toronto to understand the stability, volatility, and diversity of banking center arrangements. Our findings are testimony to the difficulties of providing classifications of IFCs. Our results position four networks of specialized banking centers that work together in an integrated, systemic way and therefore cannot be treated exclusively and compared in benchmarking exercises so often favored by policymakers. Even within banking, a subsector of finance, we see that cities (and their banking clusters) are specialized in only some activities. The complex interplay of (vested) interests, directed agency, and deliberate (state) policies that shape the resulting patterns of our structural analysis call for greater analytical attention.

A key question is how stable these configurations will prove to be. Although this article focused on European banking networks in particular, the current stability of European banking networks has been partly achieved by growing business outside Europe. This paradox applies mainly to the financial subindustries of private banking and securities industries, both with a weak or nearly absent relation between (the square root of) national GDP and the number of banks. For example, already in the early 2000s, Swiss and other European private banks have started to move much of their business to Asia to participate in this new growth market of “new” wealth as opposed to the private banking in Europe based largely on administrating “old” wealth. These extra-European connections are not visible in our analysis but are an important additional explanation as to why the European banking center landscape is still comparably stable in a fast-changing environment.

Both Luxembourg and London heavily rely on foreign banks. As these are controlled from abroad, this can turn out to be(come) a destabilizing factor. Once the macro-business environment of a banking center changes, for example, due to new global tax or post-Brexit-related regulations, banks may reorganize their foreign branches and subsidiaries. Luxembourg, for example, has recently seen relocations of the German Commerzbank and the Swiss bank Pictet to Frankfurt. However, private banking usually feeds the asset management industry, and because Swiss private banks, not being part of the EU, also need to set up EU-based subsidiaries, much of the Swiss private banking business is channeled via and into Luxembourg’s fund industry. The ecosystems of both the Swiss (Zurich/Geneva) and Luxembourgish banking hubs have co-evolved in a close relationship over time and include, as shown in our data, the traditional private banking centers Vaduz and Monaco. This interpretation of our research results calls for scrutinizing the nature of these historically grown relationships further.

Since the 1990s, banks have disproportionately benefited from an era of financial globalization and “cheap money.” This new debt-based financial growth regime has favored those who are able to benefit from (artificially) inflated asset prices, while less privileged groups have lost out (cf. Boyer, 2000). The enormous urban housing problems are probably the most visible example of the resulting sociospatial inequalities. Meanwhile, a thriving banking sector has fueled the rise of “other” financial services that have surfed the wave of cheap credit and private wealth creation, financial speculation, and even fraud (see Nesvetailova and Palan, 2020), and are concentrated in the localized financial economies of a limited number of thriving IFCs. The era of loose monetary policies and cheap credit is ending, however, with different perspectives for the diverse banking functions and their centers we have discussed in this paper.

In conclusion, we argue for future research on the drivers and their outcomes influencing the degree of (in)stability within and between banking center networks in Europe. Our research shows that there are numerous overlaps between different banking and financial sectors in some key IFCs. These overlaps hold great potential for inconsistencies between financial subindustries. Therefore, it is important to understand the different spatial-functional logics of different banking industries and how overlaps in specific locations intensify, reinforce, offset, or undermine regulatory and financial innovation activities. Finally, we point out that the stability of the European banking sector is increasingly “borrowed” from external linkages. More systemic approaches, including qualitative data, would be needed to interpret the structural nature of the study in this article, not least given the competing agencies and vested interests of banking subsectors that manifest themselves within and across financial and regulatory spaces, and a looming new chapter in the “finance-led growth regime” (Boyer, 2000). Path dependence and functional specialization will certainly play a role when facing new instablities.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The research leading to this paper received grant funding (G0A9617N) from both the Flemish Fund for Scientific Research (FWO) and the Luxembourg National Research Fund (FNR).

ORCID iDs

Jan Musschoot

Ben Derudder

Notes

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