International Financial Centers

Given the recent international transmission of the US sub-prime loan crisis, it is a particularly appropriate moment to consider the long-term development of financial markets and the growth of international capital.

As financial services are increasingly becoming an important component of the service sector of urban economies across the world, an increasing sophistication in their provision is emerging through the coverage of services at various levels and their convergence. In this context, financial centers are becoming important to provide various levels of services. These international financial centers are multidimensional in nature with various factors integrating to provide the necessary infrastructure to support international financial business. Wikipedia defines an International Financial Centre as a non-specific term of reference usually meant to designate a city as a major participant in international financial markets for the trading of cross-border assets. An international financial center (sometimes abbreviated to IFC) usually have at least one significant stock market as well as other financial markets, as well as being subject to a significant presence of international banks.”

International Finance Center (IFCs) is, at its simplest, the provision of financial services by banks and other agents to non-residents. These services include the borrowing of money from non-residents and lending to non-residents. This can take the form of lending to corporates and other financial institutions, funded by liabilities to offices of the lending bank elsewhere, or to market participants. It can also take the form of the taking of deposits from individuals, and investing the proceeds in financial markets elsewhere.

Financial centers such New York and London can expect significant economic impact from the global contraction of the financial sector. The fiscal effects on New York City and New York State will be particularly acute, due to their heavy dependence on tax revenue derived directly or indirectly from financial sector performance. The most pronounced impact of the financial crisis has been faced in the states that comprise the New York metropolitan area - especially New York and New Jersey -- and New York City itself (which despite recent past decentralizing trends, remains the centre of the US financial industry, and more significantly, a cornerstone of the city, state, and regional economy).

Financial sector shrinkage will sharply diminish New York State and City tax revenues (which comprise a combination of income, consumption, and property taxes). Youssef Cassis, Professor of Economic and Social History at the University of Geneva wrote a history of IFCs to mark its bicentennial, and they have certainly generated a fine monument to commemorate their anniversary. This is a truly scholarly work of synthesis drawing on an impressively comprehensive bibliography and with a helpful glossary included.

Beginning with the rise of private banks in the eighteenth century and concluding with the financial conglomerates and hedge funds of the early twenty-first century, Cassis has produced a comprehensive overview of the developments of the main centers of capital: London and New York, Amsterdam, Paris, Brussels, Zurich, Frankfurt and Tokyo. His account shows how these centers were buffeted by political crisis and military conflict but proved resilient through innovation and specialization. The structure is strictly chronological, although themes of rivalry and competition, regulation and innovation emerge. Changes in the financial architecture are traced throughout as private banks gave way to joint stock banks, and stock markets matured and became international.

N Janardhan Rao, Senior Economist.