david clementi : the city and the euro : innovation and excellence speech by mr david clementi, deputy governor of the bank of england, at the city seminar on'london into the 21st century'at the palace hotel, tokyo on 13 february 2001. * * * introduction the city of london is, and always has been, a centre of innovation and excellence. i want to talk to you today about the city's role in the euro markets as an example of how london proposes to maintain its standing and reputation for innovation and excellence in the 21st century. for me, it is a great pleasure to be able to talk to you about this here in tokyo. there are historic links between tokyo and the city of london, and i am glad that these links are continuing to flourish. we welcome the fact that so many important japanese financial institutions are represented in london ; and, of course, that uk - based financial institutions have operations here in tokyo. it is not surprising that there are such strong links between tokyo and the city of london, because london is one of the three global financial centres, alongside tokyo itself and new york. tokyo and new york are global centres because of their large domestic markets. unlike tokyo and new york, london's primary focus is international. london is much the largest international financial centre in europe. historically, london developed as a financial centre because of the international role of the pound sterling. but nowadays, london's role depends mainly on making markets and providing financial services in foreign currencies, like the dollar. that means that london continues to thrive only by remaining internationally competitive. and i should add that we in the bank of england take a close interest in this. maintaining the stability of the financial system and the effectiveness of the uk's financial services are key objectives for us. the city is a centre of innovation and excellence london is internationally competitive, because it acts as a centre of innovation and excellence, in a whole range of complementary ways. • london has a vast, critical mass of markets and financial services in commercial and investment banking, securities and derivatives, fund management, insurance and commodities. • london has a long track record of innovation, and a ready availability of financial skills and professional support services in law, accountancy, tax, property and communications. more than 300, 000 • people work in financial services in london, and nearly a further 600, 000 work in the supporting professions and services. • london is at the forefront of technology, with an effective

to the equivalent of around $ 6 trillion, compared with some $ 16 trillion in the us. ) since the launch of the euro, the focus of risk assessment in the corporate debt market has shifted from currency risk towards credit and liquidity risk. a growing number of companies in the euro area have been seeking external credit ratings. and an equity culture is beginning to take root in the euro area, despite the volatility in tmt stocks over the past two years. in europe as a whole, for example, there were over 17, 000 m & a transactions with a combined value equivalent to $ 1. 5 trillion last year. the second change concerns the integration of euro trading and settlement. trading has increased in most euro markets, and dealing spreads have narrowed. electronic trading and communication networks have greatly increased the reach of traditional financial markets, while allowing new providers to enter at relatively low cost. in particular, there has been much greater cross - border activity in europe, supported by fully - integrated pan - european systems for making wholesale payments. but many systems for the trading, clearing and settlement of securities are still fragmented nationally by sector. market firms are keen to see consolidation of the arrangements for clearing and settling securities trades, where costs are still considerably greater in europe than in the us. even without mergers, market firms can of course trade remotely from a single location, though this does not address the issue of duplicate investment costs. but it seems that full rationalisation may take years to implement and, while the broad vision of integrated european systems is widely shared, there are still differences of view about how best to achieve it. the third change is the diversification of investment. the launch of the euro has begun to encourage a shift in funds away from the particular national market in which they have traditionally been invested, and towards investment across the euro area as a whole. this helps to explain the increasing use by fund managers of european benchmark indices against which to measure investment performance, rather than national benchmark indices. portfolio diversification has so far been rather slower than originally expected. but there is evidence that diversification is continuing to take place, and it is expected to pick up over time. fourth, financial institutions themselves are consolidating, including in some cases across borders, so that they can better provide a service to clients across the single european market as a whole. consolidation is already far advanced in investment banking, where critical mass is of particular importance to profitability, and a us link has proved