User:Dr Gangrene/Banking in Luxembourg

Luxembourg's history as a financial centre starts with the establishment of the Banque et Caisse d'Épargne de l'État and the Banque Internationale à Luxembourg in 1856. Its evolution towards becoming an international financial centre did not start until 100 years later, when American, German and Swiss banks set up operations there to operate on the European market.

The growth of the Luxembourgish iron and steel industry in the 19th century, facilitated by the country's entry into the Zollverein and the influx of German capital to the Grand Duchy, led to the creation of the country's first private bank in 1856, named the "Banque Internationale" by its German founders. The Caisse d'épargne de l'État was established around the same time.

After World War I, the Zollverein and the German Empire came to an end, and Luxembourg had to seek a new economic partner. Soon, it joined the Belgium–Luxembourg Economic Union (UEBL) with Belgium. In 1919, the Société générale de Belgique established a branch in Luxembourg, which 16 years later would become the Banque générale de Luxembourg.

The late 1920s saw the first attempt to establish a financial centre in the country. The fledgling local banking community decided to establish a stock exchange, which found legal backing in the form of the law of 20 December 1927 creating the "Bourse de Luxembourg". That same year, a valuable financial instrument was established, in the form of holding companies. But it was not until 30 years later, after the global recession the Second World War, and European reconstruction, that the formula of holding companies managed to attract the interest and funds of international financiers, specifically of multinational groups which emerged all over Europe.

Eurodollars
However, exogeneous factors also played a significant role in the growth of a Luxembourgish financial centre. New York was the prototype of international financial centres. Yet ironically, it was the actions of American authorities which triggered movement towards a Luxembourgish financial centre. In an attempt to regulate its balance of trade and to stop the export of capital, the United States government in 1963 introduced a special tax on foreign bonds purchased by residents, thus obliging foreign borrowers to cover their need for dollars outside of the American market. This gave rise to the eurodollar. This new type of currency was made more attractive after a decision which limited investments by American multinationals in their foreign sites, forcing these to seek finance from foreign markets.

Two additional phenomena amplified the effect of these American measures. On the one hand, the Soviet political leadership, in the context of the Cold War, preferred to depose their dollar reserves in a safe place. They therefore transferred these from New York banks to European ones.

On the other hand, the huge price increases in oil from the early 1970s, denominated in dollars, led to a massive movement of dollars to oil-producing countries, who sought to invest this money to gain the most from it.

This rise of eurodollars signalled the start of the internationalisation of financial markets.

Luxembourg had several attributes allowing it to benefit from this internationalisation. In 1952, it had become the seat of the European Steel and Coal Community. In 1965, when the European institutions fused into a European Commission, Luxembourg became a European financial and juridical capital, which meant it became host to the European Investment Bank, which itself became a point of attraction for hte international banking world. In addition to its advantageous geographical situation (i.e. a central location), and its cosmopolitan character, confirmed by its population's multilinguism, the country could offer several indispensable attractions to a financial centre, such as political stability and continuity, due to a tradition of political coalitions holding power. It also possessed a social peace, founded on a healthy economym thanks to well-balanced public finances.

The choice of Luxembourg as a centre of the euromarket was also accentuated by the fact that very quickly the activities of this market expanded beyond dollars, to include other currencies, such as the Deutschmark. The first eurobank to be established in Luxembourg in 1967 was a German one. This was soon joined by competitors who lost no time in discovering the charms of this little country which proved an ideal springboard for German banks who wanted to position themselves in the international emerging markets. The choice was facilitated by the fact that in Luxembourg, banks were not constrained by the obligation imposed by the central bank of Germany to make a minimum deposit with the central bank. In Luxembourg, there was no central bank, so this obligation did not exist.

Bit by bit, as business in the euromarket expanded, the large foreign banks established themselves in Luxembourg. The Belgian and French banks, which were already in place due to existing economic links with Luxembourg, and the first eurobanks from Germany, were joined by big names from America, Scandinavia, Switzerland, Italy and Japan by the mid-1990s. The number of banks reached about 200. Most of these operated under the status of a company under Luxembourgish law, but a minority opted for the status of branch depending on its mother house.

The history of the financial centre in Luxembourg may be presented as a piece in three acts. The first of these represents the period of the euromarket, the second is dominated by wealth management, and the third, started just efore the turn of the century, represents the period of the euro.

The period of the euromarket covers more or less the 1970s, in the course of which the financial centre's activities were concentrated on international credits organised by the financial centre's operators, that is by consortiums of banks constituted ad hoc, and also on the emission of bonds, also in eurocurrencies, destined to the financing of these credit operations. Most of these eurobonds were quoted on the Bourse de Luxembourg, but also gave rise to the creation in 1970 of the Centrale de livraison de valeurs mobilières (Cedel, changé en Clearstream en 2000) devenue depuis lors un opérateur de clearing à l’échelle mondiale

The apparition of the ECU, the Euro's precursor, conferred an additional dimension to the Luxembourg financial centre, reinforcing its position as the finance centre of the European Community. The first issuing of bonds denominated in ECU was launched in 1981 by one of the pioneers of the euromarket in Luxembourg, the Kredietbank, on behalf of a holding of the Italian post. This was follwed by a further 800 emissions, for a total of 100 billion ECUs over the next 10 years.

Two phenomena, however, were a hindrance to Luxembourg's development as a champion of the euromarket. On the one hand, the emerging countries, having relied on a sustained price increase of their raw materials which in the end failed to come about, found themselves faced with a massive debt burden, and were no longer capable of honouring their financial engagements. This international debt crisis badly affected the operators of the Luxembourg financial centre, who had lent massive amounts of funds to the countries now in difficulties, and stopped the ascension of the banking centre of Luxembourg. At the same time, the success of this small country in attracting the lion's share of the euromarket had woken up the larger centres, such as the City of London, which lost no time in trying to attract parts of the market, making this part of their Big Bang.

Bien que désillusionnés par cette tournure des affaires, les eurobanquiers décidèrent néanmoins de rester sur place. Encouragés par des mesures ponctuelles prises par les autorités politiques luxembourgeoises, ils décidèrent d’élargir leur base opérationnelle à Luxembourg en se tournant vers d’autres activités. Ce ne fut certainement pas un hasard que leur choix se porta sur la clientèle privée comme nouveau créneau, cette clientèle ayant non seulement fait le bonheur de la Suisse, grand modèle de la place de Luxembourg, mais recelant surtout un potentiel de croissance considérable.

En effet, la reconstruction d’après - guerre terminée, la croissance économique s’installa de façon durable dans les pays de l’Europe de l’Ouest, faisant germer une aisance matérielle qui gonflait à la fois la consommation et l’épargne dans cette partie du monde. L’industrie bancaire se retrouva face à un nouveau type de client dont la capacité d’épargne et donc de placement ne cessait de croître. Bien que, pris individuellement, toujours modeste, le nouveau type de client gagna vite

en envergure grâce à l’effet multiplicateur du grand nombre