Mr George looks at past, present and future challenges
for the City of London
Speech given by Mr Eddie George, Governor of the Bank of England, at a City University Conference
at the International Maritime Organisation in London 7 December 1999.
* * *
Mr Chairman, Ladies and Gentlemen,
As we approach the end of every year we naturally tend to look back at the past, to take stock, and to
look forward to the challenges ahead. The temptation to do that this year on the brink of the new
Millennium, is almost irresistible.
But take courage - I will at least try not to dwell upon the historical origins of the City this morning.
Instead, I will start from where we are now - which is a good place to start because by and large the
City is in pretty good shape.
It is, of course, the hub of the financial and business services industry of this country, which, broadly
defined to include shipping and real estate as well as other forms of intermediation, and the
accountancy and legal professions, contributes directly something like a quarter of total national
output - with some 7-8% coming from the financial services sector alone.
And, whatever the periodic outcry whenever something goes wrong - as it will from time to time - the
demand for these services does not of course exist in a vacuum; it exists because of the very positive
contribution that the business services sectors, including financial services, make to growth and
employment and rising living standards in the wider economy. That is true nationally, but it is equally
true in a global context. Indeed the unique characteristic of the City is its role as the predominant
international financial centre. It accounts for a fifth of all international cross-border lending, for
example; for a third of global turnover in foreign exchange and OTC derivatives, and as much as
two-thirds of issuance and secondary trading in eurobonds, or of global turnover in international
equities, with more foreign firms listed on the LSE than on any other exchange. And London has a
near-monopoly in exchange-traded short-term euro interest rate derivatives.
I will not labour the point further, Mr Chairman. Despite - or perhaps driven by - a continuous stream
of shocks and competitive challenges, the City has in fact gone from strength to strength, most
recently coming through the global financial turbulence of the last couple of years as well as the
advent of the euro at least as strong as before.
It is perhaps worth asking why the City is as strong as it is.
Certainly it does have to do partly with history. The emergence of the City owed a good deal to
Britain's earlier position as the world's leading industrial and trading nation and international power.
But that does not explain its continuing strength. To explain that there are lots of factors one might
point to - the English language, the European time zone, the sheer momentum of the City's critical
mass, supported by the availability of a professionally-qualified and technically-skilled work force
which gives the City remarkable resilience and flexibility, aspects of our commercial and physical
infrastructure, and so on. All of these factors are certainly relevant factors.
But if I had to identify one factor above all that helped to explain the continuing phenomenon of the
City, it would be what I can only rather vaguely describe as the surrounding ethos of a free,
competitive, market place.
I do not at all mean by that that the City is a lawless jungle where anything goes! In fact quite the
reverse. You cannot have an effective competitive market without reasonably clear rules of the game,
both to protect society as a whole from disruption and to retain the confidence of both the providers
and users of the market by ensuring that they know what is expected of them and what they can
reasonably expect of others. The evolving legal and regulatory framework in this country, together
with the self-regulatory disciplines applied by the relevant market organisations and professional
bodies have been - and remain - a vitally important asset for the City in this context.
It is not just the structure of these arrangements but their substance and the manner of application of
the rules of the game that matters.
It is all too easy to err on either side. The rules may be so loosely drawn that market participants and
market users lose confidence and go elsewhere; or they may be so tightly drawn that they discourage
competition and inhibit innovation. Equally, the actual, as distinct from the intended, balance between
social protection and fairness on the one hand, and competition on the other, may be affected by the
approach adopted by the various arbitrators. Theirs is a difficult job at the best of times. We've all
seen matches ruined by either unduly lax or unduly officious refereeing. But ultimately the character
of the game depends upon the self-discipline, as well as the skills, of the players.
In general I believe that we in this country have been well served in these respects. There has been
relatively little systemic disturbance in recent years, and what there has been has required relatively
modest commitment of public funds. There have, it is true, been periodic concerns about business
behaviour. Where these have been general concerns - often reflecting the rapid evolution of the market
place or rising public expectations - they have mostly been addressed by reinforcing the rules of the
game. Or where they have reflected the behaviour of individual firms or their employees they have
been pursued - not least to encourage others. Of course we need to remain constantly vigilant in all
these areas to retain confidence in our market place. But all the evidence suggests that such confidence
remains strong by any international standards.
There are three characteristics of the City's market ethos that I would point to in particular.
Quite early on in my career at the Bank - more years ago than I care to remember - I was profoundly
influenced by the man then responsible for administering Exchange Control - Brian Bennett. He had,
framed on his desk, a wartime poster which read "Freedom is in peril - defend it with all your might."
And he explained to me that this was to remind him that his job was not simply to apply the 4
Exchange Control regulations - though that certainly was his job; it was also to help people to do what
they were seeking to do consistently with both the spirit and the letter of the law. I like to think that
that philosophy has informed - and continues to inform - the approach to applying the rules of the
game more generally in the City.
A related characteristic is that apart from defining, and applying, constructively, the rules of the game,
the various authorities do then leave the market to get on with it - they do not by and large seek to tell
the various markets, or firms operating within them, what they should or should not do. In the Bank,
for example, we always stand ready to help when market participants collectively seek our help - say,
in relation to market infrastructure projects where, working with market participants, we took on the
development and introduction of new settlements systems for the Gilt-Edged, Money and Equity
markets and new wholesale payments systems - but we try to avoid either dirigisme or unnecessary
conservative resistance to market initiatives, whether collective initiatives, such as the creation of
LIFFE, or initiatives at the level of the individual firm. We may act as a catalyst, encouraging different
sectors of the market to address emerging problems, either on their own or by coming together, but
essentially we take the view that the markets and firms themselves are best placed to find the way
ahead.
The third characteristic of what I've called the free market ethos - and one which is absolutely crucial
to the City's success - is impartiality and even-handedness, both in the application of the rules of the
game and in terms of business opportunities - applying the same standards to all market participants or
would-be participants, regardless in particular of nationality.
Some people still find this difficult to understand. A few years ago Japanese bankers used to tease me
by asking what I thought of the "Wimbledonisation" of the City - meaning that this country organised
the best competition in the world but the visitors carried off the prizes. I used to explain to them that it
was activity - rather than nationality of ownership or even control - that mattered in terms of the City's
contribution to the wider economy, and in terms of its direct contribution to growth or employment, or
of income or tax base in this country; I even suggested that Tokyo would benefit as a financial centre
if it became more open to overseas players. I don't think that they were convinced at the time. But
now that has begun to happen, and some of my Japanese banker friends tell me they finally see the
point. It is in fact of course more generally a lot harder to see the benefits of increasing global
competition if you are an existing producer, whether an individual business or the national
representatives of businesses directly in the firing line than if you are looking at it in terms of the
health of the macro-economy. But there is no doubt that it is this characteristic of openness to
competition perhaps above all that explains the uniquely international nature of the City (with more
foreign banks represented here than in any other centre) and accounts for much of the City's
continuing success.
So much then, Mr Chairman, for the past, let me turn now to the challenges and prospects for the
future.
The most immediate challenge is to get through to the next millennium without significant mishap - to
demonstrate that we have indeed succeeded in overcoming the Y2K bug. In fact I have no misgivings
on that score as far as the City is concerned. The preparation has been immensely thorough. The Bank,
with our colleagues in the FSA, and with our counterparts abroad, has worked with the financial
markets, both on that technical preparation and to ensure that the necessary liquidity will be in place.
That in turn has provided a degree of reassurance - to financial intermediaries and to the public more
broadly - that should help to avoid undue precautionary behaviour which might otherwise prove
disruptive.
A second challenge is the advent of the euro - and on this score, too, I have very few misgivings. Even
before the introduction of the new currency the City played a very positive role in its technical
preparation - and one which has been widely acknowledged. And since that introduction the City has
continued to play a very active part in the development of the broader, more liquid, financial markets
which the euro has made possible, and which are vital to its success as a widely-used international
trading and investment currency. This activity is in fact the greatest contribution that the UK can make
to that success from the outside. Of course the City is in competition with other financial centres
elsewhere in Europe. But as I have often pointed out before, at the macro-economic level such
competition is a positive-, not a zero-sum game from which we collectively, borrowers and lenders
and market intermediaries, all stand to gain. I have every confidence in the ability of the City to thrive
in this competitive environment - but it will thrive not at the expense of the rest of Europe but
alongside other European financial centres. And in that context suggestions that we should be
somehow artificially disadvantaged are irrational.
The third challenge confronting the City - and a much more fundamental one - is the accelerating
advance of information and communications technology which is currently sweeping across the whole
of the global economy. In the financial services sector in particular it is the major driver of change and
innovation. It makes possible the introduction of a whole raft of essentially new financial services and
products, and it is radically changing the way in which they and existing services and products are
delivered, whether in wholesale or retail financial markets, at a fraction of the existing cost. In
wholesale markets it will affect the whole spectrum of activity - from trading through payments and
settlements, across the whole range of financial instruments, across national boundaries - not simply
within Europe although that is an immediate focus of attention - and it has the potential to alter
fundamentally the relationships between end-users of the markets, intermediaries and exchanges. And,
at the retail level, too, we will all eventually need to learn to live with totally new, and more efficient,
ways of doing things - though that will no doubt come harder to people of my generation!
I don't think anyone at this stage can see at all clearly the end-point of all this or even necessarily the
appropriate next steps. And that is why we are seeing a continuous, and often bewildering, stream of
new individual and collective initiatives, many of them involving the same participants, both in this
country and abroad. Some of these initiatives will inevitably fall by the wayside - that's part of the
process by which the market as a whole discovers the way ahead. But those that do succeed will
succeed because they add value by meeting more effectively the needs of the consumers of the
products and services they provide. As an intensely interested - but non-commercial - observer of it
all, I find the whole process hugely stimulating and encouraging. I recognise that I might feel
differently if I were a commercial rather than a central banker, but I'm impressed by the fact that most
of the commercial bankers I talk to see it in terms of opportunities rather than threats.
The other challenge to the City that I would draw attention to is the quite different challenge
associated with growing social concerns and rising public expectations, which are probably heightened
by the rapid pace of financial change associated with advancing technology.
In part these concerns relate to perceptions of increased risk of financial instability. There has been,
and I suspect will continue to be, increasing public emphasis - both domestically and internationally
within the IMF, the new Financial Stability Forum and the BIS, for example, notably in the wake of
the recent global financial turmoil - on reducing systemic financial risk and on how to handle systemic
disturbances when they occur.
But the social concerns go well beyond this sort of systemic issue. They include growing concerns
about organised criminal abuse of the financial system, for example; they include an increasing
emphasis on consumer protection - particularly protection of the less financially-sophisticated in an
increasingly complex environment; and they include questions relating to the financial exclusion of
disadvantaged sectors of the community. In all these respects, too, the concerns are not just domestic
concerns but have close parallels internationally.
It seems to me that in many instances the new technologies, appropriately deployed, actually improve
the capacity of the financial system to address these concerns. But if they are not adequately addressed
- whether within the system as a whole or at the level of the individual market or individual firm - they
could - like purely financial failures - weaken public confidence or attract public responses, which
would have a damaging effect on overall activity.
Mr Chairman, I can't imagine that anyone working in the City will become bored as we move into the
new millennium in the face of these challenges.
How successful we are in confronting them will depend, as in the past, upon the interaction of the
technical and professional skills and self-discipline of the market and the structure, substance and
application of the rules of the game as they are reflected in public policy.
We have unique experience within the City on which to build.
The market has repeatedly demonstrated its capacity to respond successfully to new challenges and
currently attracts representatives of the strongest participants from all parts of the world. It is
supported by very highly qualified professionals and professional bodies which play an important role
in setting and maintaining standards. It is supported, too, by an extraordinary range of specialist
professional and technical organisations, which help to ensure that the rules of the game are sensibly
formulated and clearly understood. And it is supported by a very strong tradition of technical training
and education through the various financial institutes, a tradition which I hope may soon be bolstered
by the development of a coherent set of professional qualifications across the different financial
market sectors.
But how far we remain successful will depend importantly, too, on how far we are able to maintain
what I have described as the ethos of the competitive market place in a rapidly changing environment
and that will represent a considerable challenge to public policy. Given market self-discipline, I have
every confidence, Mr Chairman, that the various competent authorities will remain constructive and
impartial in their approach to defining and applying the rules of the game, and open to innovation and
wide participation, so that the City retains its position as an attractive location for the provision of
financial and business services.
So, Mr Chairman, I look to the future of the City with very considerable confidence. On recent form it
has little to fear and great opportunities to look forward to. But I don't say that it will be easy.