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Capital Concerns

Prepared by: Lee Hudson Teslik
July 25, 2007

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Location, location, location. Not so long ago, the golden rule of real estate was also the organizing principle for the world of high finance. Bricks-and-mortar exchanges dominated the scene and financial services firms arranged themselves not at city level, but that of the district (London’s “City of London”), or even the street (New York’s Wall Street). This geographical clustering made sense. Being on-scene meant access to premier products—say, those equities prestigious enough to trade on the New York Stock Exchange. But in the blink of an iBook, globalization opened financial market access to millions of newcomers. The fallout prompted a broad reexamination of what it meant to be “on scene.” As this new Backgrounder notes, it also ushered in a sweeping geographical reorganization of the global financial services sector, the emerging effects of which promise to shake up finance and geopolitics alike.

New York, commonly deemed the world’s financial capital, finds its foothold eroding. A recent McKinsey report (PDF), commissioned jointly by New York City and the U.S. Senate, says that without major administrative changes, Wall Street stands to lose its premier status within the next ten years. The report spotlights the stringent accounting standards mandated by the 2002 Sarbanes-Oxley Act on corporate governance, as well as the prevalence of frivolous litigation.

Much of the exodus from New York comes in the realm of capital formation. McKinsey estimates the share of global initial public offering (IPO) revenues raised in New York in 2006 is roughly a third of what it was in 2001. Much of this business finds its way to London, which the New Republic recently called the “New New York.” The British-based Economist points to a number of metrics, including foreign equities turnover and international bonds sales, in which London already leads New York in global market share. The Financial Times notes that several South and East Asian cities are also jostling for position in the global financial markets. Specifically with respect to IPO revenues, McKinsey says Hong Kong will raise more money through this year than either New York or London.

None of these shifts transpire in a political vacuum. In his book, Financial Statecraft, CFR Senior Fellow Benn Steil explains how the transaction of financial assets across state borders, in part through the exchange of foreign debt and equities either by governments or private firms, is increasingly used as a lever of political influence. Steil and others note that government attempts to harness financial flows, which some experts say exert more power than standard sanctions, are rapidly surpassing sanctions as the preferred form of coercive economic foreign policy. This sort of influence requires financial clout, and when countries host financial exchanges they increase their power to regulate these transactions. But as governments bulk up their financial assets, the Wall Street Journal notes that they often find themselves the subject of increased scrutiny.

The rising competitiveness of the global financial services marketplace may force New York and other traditional financial centers to adapt, improving the sector’s efficiency overall. They also pose regulatory concerns, however, as New York Mayor Michael Bloomberg and Sen. Charles Schumer highlighted in a recent Journal op-ed. Given the fiercely competitive environment, Bloomberg and Schumer note that “foreign markets may be tempted to lower regulatory requirements to achieve a temporary competitive advantage,” thereby potentially destabilizing the international marketplace.

More on This Topic

Book

Financial Statecraft

Authors: Benn Steil and Robert E. Litan

Over the past two decades, another form of economic exchange besides imports and exports has risen to a level of vastly greater significance...