london as a financial centre and it was the emergence of the us as an economic power that drove the th concentration of activity in new york at the end of the 19 century. we may be seeing this effect in shanghai today. one can only postulate, why, over the last 50 years, london has flourished as a truly international – not just a european – financial centre despite the relative decline in global importance of the uk and indeed the european economies as globalisation has advanced. the uk ceased being a surplus country and thus exporting savings in the 1930s ( see chart 1 ) and moved into a sustained deficit at the start of the 1980s. there are a number of possible explanations that are not mutually exclusive. a number of members of the european union have maintained large surpluses of savings relative to domestic investment. since the creation of the single market in financial services in the mid - 1990s, london has become the financial centre for the whole european region. but while this may explain some of the resurgence of london in the past 50 years, it does not explain it all. london ’ s revival started well before the eu ’ s single market in financial services – indeed at a time when most eu members had capital controls. and the share of non - eu related business is markedly greater than of eu business. this point has been noted by charles kindleberger. see ‘ the global financial centres index 20 ’, september 2016, published by the z / yen group. all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx a second possible explanation is that modern financial markets are so large that the surplus generated by an original trade or manufacturing activity is far less relevant now than before. after all, since the abolition of capital controls after the end of the bretton woods era, financial services have grown a lot faster than global trade. in the uk, gross financial flows grew rapidly from the 1980s to the end of the 2000s and became larger than trade and current account flows. once financial flows start to move through a financial centre, the ensuing returns to scale and specialisation generate greater financial flows through the centre. the flows associated with the uk ’ s extremely large external asset and liability position may have helped to reinforce this dynamic. a related point, one that i touched on earlier, is that physical location does not matter anymore, since technology allows investors to pick the most efficient location to manage the global allocation of capital. in this case,

. your members, and indeed the businesses which employ them, are entitled to be angry. but however legitimate, anger will not produce change unless its energy is harnessed to a cool analysis of what happened and why. so i want to discuss the fundamental causes of the crisis before turning to current policy. the fall of the berlin wall in 1989 changed both politics and economics. within a few years, the former soviet empire, china and other asian economies, with their combined workforce of over a billion people, entered the world trading system as market economies. their focus on export - led growth allowed consumers in the west to enjoy rising living standards as the prices of traded goods fell. but the trade surpluses in emerging economies implied an outflow of capital. relatively poor countries were lending money to richer western ones – the reverse of the traditional model of development. in the process, countries like china built up huge holdings of foreign assets – running into trillions of dollars – matched by equally huge debts in the deficit countries. such massive imbalances were never likely to be sustainable, and so it proved. if the first fundamental cause of the crisis was the scale of imbalances in the world economy, the second was the inability of our banking system to absorb such large inflows of capital without taking excessive risk. in the five years leading up to the crisis, the balance sheets of the west ’ s largest banks doubled – mainly because banks lent more to other firms within the financial sector than to the wider economy. and the proportion of capital held by banks shrank so that their leverage – the ratio of total liabilities to equity capital – rose to unprecedented levels. immediately prior to the crisis, the leverage ratios of some uk banks approached 50. to say that was risky is an understatement : at such levels, a 2 % fall in the value of a bank ’ s assets is sufficient to wipe out its capital and render it insolvent. remuneration, especially the structure of financial sector bonuses, encouraged excessive risk - taking, and distorted the aspirations and career choices of too many talented young people. investors, banks and regulators had been swept up by the apparent success of modern finance. when investors realised that many of the assets that banks held on their balance sheets were opaque and hard to value, there was immediate and justifiable concern about the solvency of many of those banks. at the end of 2008, these two fundamental factors culminated in the worst financial crisis in history. in the