‘The City’ is a term often used to refer to the whole financial sector in London, but what exactly does it involve? It can be a confusing industry when you are just starting out in finance, but this article (an extract from the excellent book ‘The City: Inside the Great Expectation Machine‘) gives an overview of the reality of the finance sector and dispels a few common misconceptions:
“The ‘City’ really is very different from perception. The diversity of activities is much greater than commonly supposed. More information still, these activities are highly fragmented. The image of the monolith needs to be replaced by a different image: a series of circles of different sizes, some overlapping, some just touching, many making no contact at all. For example, institutional investors (principally pension funds, insurance companies and unit trusts) invest in the stock market using securities firms to buy and sell for them, so these activities clearly overlap. These same institutions may invest indirectly in the financing, of say, a power project in China which has been arranged by a project finance department of an investment bank. In terms of our image, the circles only touch in the instance. The project financiers do not sell the project to the investors – this is the job of others in the investment bank – but a relationship exists between the investors and the project finance team.
But between many City activities there is no relationship at all. A trader in the equity market will know nothing of the workings of the London Metal Exchange (where world prices are set daily for the likes of copper and aluminium) let alone the Baltic Exchange, which is the pre-eminent international shipping services marketplace. Equally, participants in these specialised markets will have little knowledge of the job of a stock exchange market maker or an institutional equity salesman. There is no point at which these activities touch, even though they are functionally similar.
Given this degree of diversity, what then defines ‘the City’? A precise definition is practically impossible. Certainly, there is an emphasis on wholesale (corporate and institutional) activity rather than retail (personal) financial services. The Bank of England, the Stock Exchange and Lloyd’s of London are clearly part of the City but where do we place lawyers and accountants who provide essential support services for City activity? They may have branches elsewhere and do much work that is unrelated to the City. For many journalists at the popular end of the media spectrum these definitional niceties are not a problem – ‘City’ is synonymous with pretty well anything financial (it has the additional merit of being a short word, which makes it ideal fir headlines!)
Nor can ‘the City’ any longer be defined geographically, in terms of the area administered by the Corporation of London (the local authority responsible for ‘the Square Mile’). Several of the largest investment institutions are not and have never been based in the City. Edinburgh is home to Standard Life, one of the largest insurance companies in the UK and a leading equity investor. Some firms of stockbrokers ‘defected’ to the fringes of the City in the early 1980s. Salomon Brothers, the US investment bank, chose in 1984 to move to a building next to Victoria Station in central London. A 1998 report commissioned by the Corporation of London sensibly conceded defeat on geographical front. It conventionally defined ‘the City’ as covering all ‘City-type’ activities that take place in Greater London.
As a general rule, until the late 1980s, both domestic and foreign financial institutions preferred to have their London base inside the City where the UK merchant banks, insurance companies, stockbrokers and other key participants were located. The soaring rents of 1986/87, together with the need for larger offices and advances in communication technology, caused an exodus both westwards (to the West End of London) and eastwards (to Canary Wharf in Docklands). Many of the big investment banks are now located at Canary Wharf (Morgan Stanley and Credit Suisse First Boston were founder members). Today ‘the City’ is a financial rather than a physical entity.
The bit of the City that is visible to the world at large is the one talked about in the business pages of the equity newspapers, in which the emphasis is on macroeconomic trends and British quoted companies. News relating to UK companies and their share prices dominates because that is what is relevant to the great majority of public readers, as investors or employees. How much press coverage is given to the City’s role in the flotation of Polish Telecom or the financing package for an iron ore mine in India? None, except possibly deep inside the ‘Companies & Markets’ section of the Financial Times.
Investment banks consciously use their equity activities – because they are visible – as the ‘shop window’. But behind the scenes lie many other City activities and have little or no public profile, which are often larger in scale and quite possibly more profitable. A good example is the Eurobond market (nowadays more properly called the market for ‘international securities’). In short, it is important not to lose sight that the greater part of the City functions quietly out of the limelight – and that these ‘invisible’ operations are actually more important to its continuing prosperity.
Most of these ‘invisible’ operations are international in focus. In fact it is the international orientation that truly defines the City, not the services it supplies to the UK domestic market. Much of what the City does has little or no connection with the British economy. Martin Taylor, the former chief executive of Barclays, nearly encapsulated this view in a tongue-in-cheek article for the Financial Times in which he suggested that:
“The best way to think about the City…..is essentially (as) an offshore phenomenon, halfway between a Caicos Island and an oil rig” (If only the City would secede from Europe, Financial Times, 23 December 1999)
The City has always been, and indeed still is the provision of financial services to an international marketplace. It remains the largest centre for international financial transactions. Within these transactions lie many activities.
We highly recommend this book as an excellent source of all-round background knowledge on the finance sector. If you get it from the Benedix bookstore it will be delivered by Amazon (so you get a nice discount as well!)