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International Financial Centre

An international financial centre is a non-specific term of reference usually meant to designate a city as a major participant in international financial markets for the trading of cross-border assets. An international financial centre (sometimes abbreviated to IFC) will usually have at least one significant stock market as well as other financial markets, as well as being subject to a significant presence of international banks.

IFC: City or its district (1) that has a heavy concentration of financial institutions, (2) that offers a highly developed commercial and communications infrastructure, and (3) where a great number of domestic and international trading transactions are conducted. London, New York, and Tokyo are the world's premier financial centers.

GFCI Report on IFCs

The City of London regularly commissions research on financial centre competitiveness. The Global Financial Centres Index (GFCI) was designed to extend the City of London’s research by providing an ongoing rating system for financial centres worldwide.

Financial centres funnel investment toward innovation and growth in their domestic economies, regionally, and globally. Vibrant, competitive financial centres give cities economic advantages in information, knowledge and access to capital. Although financial centres compete with one another, the competition is not a ‘zero sum’ game. A strong financial centre, whether domestic, niche, regional, international or global, connects the wider economy to the global financial community. Cities that are part of the global financial network through their financial centres gain from global trade and growth. Inward and outward investment opportunities increase the wealth of cities that have financial centres, and increase the range of opportunities for their citizens.

The GFCI is based on fourteen factors of competitiveness. These factors are grouped into five key areas – people; the business environment; market access; infrastructure and general competitiveness. The features (or Instrumental Factors) that contribute to the fourteen factors of competitiveness are drawn from indices compiled by external sources.

Each of the five key areas covers several aspects of competitiveness:

People: involves the availability of good personnel, the flexibility of the labour market, business education and the development of ‘human capital’. The research specified in footnote 3 identified human capital as the single most important factor in financial centre competitiveness.

Business Environment: covers regulation, tax rates, levels of corruption, economic freedom and the ease of doing business.

Market Access: covers the levels of securitization, volume and value of trading in equities and bonds, as well as the clustering effect of having many firms involved in the financial services sector together in one centre.

Infrastructure: has to do mainly with the cost and availability of buildings and office space, although it also includes other infrastructure factors such as transport.

General Competitiveness: covers the overall competitiveness of centres in terms of more general economic factors such as price levels, economic sentiment and how centres are perceived as places to live.

Roles of IFCs

Successful financial centres can fulfill one or more of five different roles:

Global financial centres – there are currently only two centres that can claim to fulfill this role, London and New York. Global financial centres have sufficient critical mass of financial services institutions to dispense with intermediaries and to connect international, national and regional financial services participants directly. An asset manager in Munich, for example, can trade in financial instruments directly with a broker in New York without having to go via an intermediary in, for example, Frankfurt.

International financial centres conduct a significant volume of cross-border transactions – those transactions that involve at least two locations in different jurisdictions. Hong Kong, for example, is an international financial centre that is involved in a significant proportion of Asian financial transactions.

Niche financial centres are worldwide leaders in one sector; several centres score highly on the basis of being strong in one particular niche of financial services, such as Zurich for private banking or Hamilton (Bermuda) for reinsurance. Although these niche financial centres will almost certainly never rival London or New York as global financial centres, they are often as strong as London or New York within their own specialist area.

National financial centres conduct a significant proportion of a particular country’s financial business. Toronto, for example, is the national financial centre of Canada. Where there are multiple financial centres in a country, for example, Canada, Australia, Germany or the US, the situation is complicated. In Canada, for instance, the GFCI covers Toronto (ranked 15th), Montreal (ranked 30th) and Vancouver (ranked 33rd). All three are sizeable financial centres, but Toronto is the national centre. In countries where there are several financial centres, the national centre is frequently the centre for foreign exchange transactions.'''

Regional''' financial centres are defined here as centres that conduct a large proportion of regional business within one country. Chicago, as well as being an international centre, is also a regional centre for the Mid –West of the US.

The roles that the top ten financial centres can play are shown:

Sensitivity Analysis

In order to examine how stable the rankings might be in the future, the overall GFCI rating is contrasted with a centre’s sensitivity to changes in the five key areas of competitiveness. The five key areas (people, business environment, market access, infrastructure and general competitiveness) were each examined to see how they changed financial centre rankings. The consequent variance of the scores is termed ‘sensitivity’. If a centre’s ranking changed markedly when only one of the five groups of factors is applied, we may infer that it has much potential to rise or fall in the ranking. If a centre’s ranking remained stable even though only one set of factors was applied, it is more likely to remain near its present position. Chart below contrasts GFCI ratings with sensitivity:

This categorization identifies four types of financial centre:

Leaders: obviously London and New York, but also centres with strong scores in competitive factors and strong domestic markets;

Minor: centres that are not rated as highly, and are unlikely to improve in the near term;

Volatile: centres that are not rated as highly, but might be able to move upwards rapidly if they could improve in some respects;

Evolving: centres with high ratings, but susceptible to change. It is interesting to see that Dubai and Chicago are already matching some of the established centres and have the sensitivity to instrumental factors to move towards the group of ‘leaders’. Tokyo is classified as evolving and is a centre that used to count itself as a leader, but it is still recovering from difficulties it experienced during the 1990s.