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The slump in initial public offerings in London has become ever more striking. The decision by WE Soda, the world’s largest soda ash producer, to abandon plans to list in the UK comes after CRH, the world’s largest building materials group, decided to switch its listing from London to Wall Street. Fintech group CAB Payments may be aiming for an £850mn London issue but this scarcely compensates for chip designer Arm rejecting the British government’s plea to float here. All of which sits uncomfortably with prime minister Rishi Sunak’s aspiration to make financial services one of the country’s five key growth sectors.
Downbeat commentary has ensued, questioning whether the City has become too bureaucratic and risk-averse since the 2008 financial crisis, while losing competitiveness because of Brexit. Yet much of this soul searching, like the government’s aspiration to make London the world’s most competitive financial centre, is rooted in a mercantilist view of global financial competition as a zero-sum game.
We are back to picking winners. Or rather, former winners. For one of the lessons of the financial crisis was that the apparently miraculous growth in financial services was an illusion, stemming from excessive risk-taking along with frenetic innovation in complex financial products of questionable social utility.
Of course, the social utility of the equity market is not in question. And it has to be a cause for concern that the share of the equity market owned by UK insurance companies and pension funds fell from over 50 per cent in the late 1990s to 4.3 per cent at the end of 2020. This has prompted a debate as to how unicorns (unquoted tech companies valued at more than $1bn) can find access to risk capital.
That said, globalisation works to a degree. Foreign investors now own more than 50 per cent of quoted UK equities — though how ready those investors will be to back unlisted companies is moot. Note, too, that the wider fears about London’s loss of competitiveness as a result of Brexit are wildly overdone. The latest Global Financial Centres Index published in March by the London-based think-tank Z/Yen Partners and the China Development Institute in Shenzhen continues to rank London second after New York.
In the meantime, a survey last year by the Bank for International Settlements into London’s role in trading interest rate derivatives, foreign exchange, international banking and bond underwriting found that the city’s position had eroded in two areas but only at the margin. It lost share in trading euro over-the-counter derivatives to eurozone centres. Yet its share remains more than twice that of all the centres of the eurozone.
In international banking, London’s ties to the euro area have loosened partly due to the shift of euro repo clearing from the UK to France. But the BIS report says that “London’s longstanding advantages of scale, scope and timezone may well sustain its pre-eminence as an international financial centre”.
For Britons of a mercantilist inclination, this is stirring stuff. The European authorities’ sustained efforts to shift euro-denominated financial activity across the Channel have been substantially rebuffed, although the battle is far from over.
There are nonetheless grounds for concern over this very success. The 2008 crisis demonstrated that the British economy was sectorally under-diversified and overdependent on a financial system whose excesses were capable of sabotaging the rest of the economy. Financial services, today representing 8.3 per cent of total economic output, are only marginally down on their pre-crisis level.
Banking has since been more heavily regulated. But as last September’s pension fund-induced turmoil in the gilts market indicated, risk has migrated to non-bank parts of the financial system. Nobody can be sure what horrors are lurking in the nether reaches of the shadow banking swamp.
There are grounds for questioning the government’s desire to promote financial services. In a paper for the BIS, Stephen Cecchetti and Enisse Kharroubi have shown that there is a point where both financial development and the financial system’s size turn from good to bad and become a drag on growth. The expansion of finance then consumes scarce human resources that could be better used elsewhere.
Also noteworthy is that during the UK’s period of highest postwar growth in the 1950s and 1960s, the banking system operated as a low-risk utility. There were no banking crises.
This leads to the thought that a loss of comparative advantage has occurred in one part of an oversized financial system, the equity market. Skilled jobs will be lost. Why not accept the powerful logic of the law of comparative advantage and allow the market to be the wise arbiter of redundant employees’ next career destination?
