Why do Financial Centers Matter?
OPINION #3 : Hubertus VÄTH
International Financial Centres provide low transaction costs, easy access to the capital, qualified labor force, political stability, and dynamic business eco-system.
Table 1: Instrumental factors in assessing an IFC

An international financial center (IFC) is an intense concentration of a wide variety of international financial businesses and transactions in one location.

IFC establishment process is a self-improvement process for a city or even a country. Because there are various factors influencing the development and competitiveness of IFC. For example, according to The Global Financial Centres Index (GFCI), the contributory factors to assess an IFC are Business Environment, Human Capital, Infrastructure, Financial Sector Development, and Reputation (see Table 1). In other words, to have a successful IFC, countries can get not only economic benefit but also all-round strategic advantages from it. In reality, we see IFC economies have proliferated in the period since 1980, with average per capita annual growth rates of 3.3 percent, compared to 1.4 percent for the world as a whole. [1]

Table 1 Instrumental factors in assessing an IFC (see above)

There are at least four ways in which IFCs contribute to the operation of economies:

1. IFCs promote good governance of a country which will, in the long run, do good to the national economy. The evidence indicates that by far the most successful international financial centers are those whose governments score highly on the World Bank's indicators of governance quality.

2. IFCs are countries and territories with tax and regulatory policies that are particularly favorable to foreign investment. IFCs encourage new businesses with favorable telecommunications and transportation facilities and limited bureaucratic hurdles.

3. IFCs bring benefits not only for one country but to the whole region, even the whole world. In the era of globalization, investment, employment, and innovation in one place contribute to related activities elsewhere.

4. IFCs bring positive effects on the macroeconomic indicators, i.e., employment, capital inflows, rapid establishment of infrastructure, etc. All of these will in long run provide energy for national economy.

Under the backdrop of Brexit, the importance of Frankfurt as an IFC will be increasingly higher. So far, 52 of financial institutions have applied at Bafin to set up operations or expand existing operations. About 30 of these institutions have decided to relocate their EU headquarters to Frankfurt. Frankfurt Main Finance expects that 750 to 800 billion euros in assets will move from London to Frankfurt by the Brexit date, a third of which has already been transferred by the end of March 2019.

Due to the importance of IFC, to better advocate Frankfurt amongst the top national and international Financial Centres, Frankfurt Main Finance was founded in 2008. Frankfurt Main Finance has more than 60 members now include the State of Hesse, the cities of Frankfurt and Eschborn, and numerous prominent financial players. Frankfurt Main Finance leverages the influence of its members to provide high-caliber dialogue platforms between politics, society, academia, and the financial world.

International Financial Centres provide low transaction costs, easy access to the capital, qualified labor force, political stability, and dynamic business eco-system. The Frankfurt financial center has and will further make significant contribution to the growth of the German economy.

[1] Report: International Financial Centers and the World Economy, University of Michigan and NBER

Financial centers: from their historical roots to modern technology hubs
In a typical network effect, the more competence a financial center acquires, the most successful it becomes.
Market places have existed since humans have started to exchange goods: gathering in one place was the best way to promote transactions. Farmers came from the countryside to the cities to sell their productions: fruits, vegetables, grains, chickens, ….

The concentration of people in a central place was needed to exchange goods and information. Money and finance were no exceptions: in the early days of the stock markets, people had to come to a central place to meet and exchange news. It was very convenient for all to feel the mood of the other market participants. When everybody is optimistic, one can dare to acquire shares. Whenever the common opinion turns sour, it is time to take one's profit and sell.

Very rapidly, technological innovations brought advantages to the early adopters. The telephone allowed brokers to communicate much quicker with their investors. In the building of the stock exchange, those whose telephone boots were closer to the trading floor had an edge on their competitors. It was also advisable to have young jobbers who could run faster to communicate hot news and transmit orders.

Today, the speed of execution of orders has become crucial. With the co-location, the stock exchanges allow the brokers to put their servers in the same room as the computers that run the markets: even the length of the connecting cables is measured to ensure a level-playing field between all participants! In the race to capture a technological edge by gaining a few nanoseconds, some market participants set up their telecommunication systems to liaise in a straight line between financial centers such as New York / Chicago or London / Frankfurt.

However, financial centers include much more that trading platforms and market infrastructure: they include the banks, the insurance companies, the fund managers, … as well as the various services around finance such as law firms, accountants and advisers. For most of them, there is a strong incentive to be close to each other and close to the regulators and market authorities. Despite the ease and speed of the communication systems, the proximity is quite relevant, and market participants need a local presence if they want to capture a sizable part of the financial activities of a country or region.

Conversely, companies, and organizations looking for funding or other financial services know that the financial centers will provide them with the needed assistance.

This explains the emergence of a limited number of financial centers that have been able to attract the bulk of the business. In a typical "network" effect, the more competence a financial center acquires, the most successful it becomes!

Why do financial centers matter and how WAIFC can contribute to accelerating their development?
Financial centers increasingly help promote the growth of all the segments of sustainable finance.
The transformation of the economy and the international monetary and financial system is now well underway, breaking with the model that prevailed before the 2007 financial crisis. In the new developments that are taking shape, access to market financing, but also developments in financial innovation, sustainable finance, accelerated market opening and competition between financial centers are significant new challenges, both in terms of the competitiveness of modern economies and the need to reconcile economic growth with the satisfaction of social needs.

The prime purpose of financial centers is to meet growing global funding needs, and these are particularly high for the next ten to twenty years. These needs concern in particular long-term financing, in both developed and emerging countries. They relate, for instance to infrastructure, the digital transformation of the economy, aging populations in developed countries, the depletion of natural resources, the fight against global warming. They are estimated at more than €10,000 billion for infrastructure alone by 2030, worldwide, including €1,600 billion for Europe per year.

Financial centers provide diversified funding sources to meet these needs. Even more because, since the financial crisis, and with the implementation of new prudential rules on banking and insurance companies, a gradual decline in bank financing and a shift towards a financing model more oriented towards market financing have been observed. The issue is about financing the economy and businesses, including SMEs/ETIs, as well as employment.

Financial centers support the development of new technologies. The technological revolution is leading to profound changes in our modes of development and requires the adaptation of our economies. Obviously, the financial industry is also itself concerned by these developments, which have an impact on all its segments. In particular, new modes of distribution of banking and financial products are emerging, new players and new technologies, such as blockchain or artificial intelligence, are growing: they are thus profoundly transforming the architecture and organization of financial market infrastructures. That has triggered the rapid rise of Fintech companies, which apply technology to improve financial activities.

Moreover, financial centers increasingly help promote the growth of all the segments of sustainable finance, i.e. responsible investment, environmental finance, solidarity finance. Since the 2008 financial crisis, many questions and concerns have been raised about the way our economies and financial markets operate: the necessary long-term dimension and the Environment, Social and Governance (ESG) criteria are increasingly being taken into account in asset management. The energy and ecological transition is now a global issue, which has an impact on investment and financing conditions. The rise in climate risks is forcing financial institutions to provide new and appropriate responses. For instance, the World Bank estimates that 90 trillion dollars will be needed by 2030 to achieve the objective of limiting temperature increases to 2°C set by the Paris Agreement.

Finally, financial centers accompany the rise of emerging countries. A new global economic order is developing, in which some regions will have to perform transformations and adjustments to continue to count. A consequence of the rise of emerging countries at the global level is the emergence of new international financial centers and therefore increased competition among them: the trend is no longer towards centralization towards a few dominant financial centers in the world but rather towards the development of new financial centers with rapidly international ambitions.

To address these growing challenges and accompany the transformation of the global economy, financial centers have defined different approaches and priority actions. For example, they foster long term savings and channel them towards the financing of companies. Moreover, they encourage the development of R&D and Fintech. They also contribute to the development of a regulatory framework conducive to the development of green and sustainable finance as well as of new financing tools. Finally, they raise awareness through communication on and within the financial ecosystem and they provide training and spread expertise.

Cross-fertilization among centers is necessary to leverage collective and individual efficiencies and best practices, and thus increase competition and growth.

Therefore, the World Alliance of International Financial Centers (WAIFC) contributes to accelerating dialogue and exchange of best practices between financial centers and develop communication with the general public. WAIFC's objective is also to work closely together with knowledge partners, such as consulting firms, universities, research institutes.

WAIFC is currently working on four joint projects:

- Explain the role of financial centers in serving the needs of businesses and the economy;

- Develop a financial center database, with key statistics, systematized data and research on IFCs and related economic activities for a wide range of users;

- Discuss best practices on building up Fintech ecosystems and reflect on innovations in finance and how financial centers can support their development;

- Develop best practices in sustainable finance.
The WAIFC is a non-profit association (AISBL) registered in Belgium. Leading financial centers of four continents are among its members. In an era of breakthrough technologies and rapid social change, financial centers are crucial to sustaining economic growth. Thus, the objective of the WAIFC is to create a transparent network that facilitates cooperation and sharing of best practices to further the understanding of the importance of international financial centers for national and global economies as well as social development.

Follow us on LinkedIn (https://www.linkedin.com/company/waifc/) or Twitter (@WAIFC_).

© 2018-2019 World Alliance of International Financial Centers. All Right Reserved.