Why is the financial services industry so stable? The financial services industry is highly dynamic, yet it has remained relatively stable over recent years, with the same cities, institutions and organisations still at the forefront. We spoke to Professor Ben Derudder and Dr Sabine Dörry about their research into the underlying reasons behind the stability of these established financial centres. The major actors in the financial sector have remained fairly stable over recent years, even with the many changes and crises that the industry overall has experienced. Many of the same banks are still at the apex, and the same locations remain central to global finance, in spite of the dynamism within the sector. “There’s actually quite a high degree of stability,” says Ben Derudder, Research Professor in Urban Studies at KU Leuven. The financial services industry here means not just banks, but also other actors. “There are different kinds of banks, asset managers and different kinds of investment funds, including hedge funds and private equity. Then there’s the wider eco-system, including commercial lawyers, accountants and many other services required to set up financial structures and regulate them,” explains Dr Sabine Dörry, Senior Research Fellow at the Luxembourg Institute of Socio-Economic Research.
Financial centres A number of European cities have become established over time as important financial centres, notably London, but also Luxembourg and Brussels, for example. Dr Dörry and Professor Derudder are now collaborating on a research project, in which they are probing
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deeper into the underlying reasons behind the stability of the financial sector, and if and how cities like London stay at the forefront. They seek to tackle questions like; what kinds of functions are located in these kinds of places?
over recent years is technology in finance (Fintech), a topic that is being addressed in the project. The majority of markets are either now digital in nature or in the process of digitalising, while new markets are emerging driven by
We are trying to understand why financial centres like London, or to a certain extent Luxembourg, have remained so stable over the years. What functions are located in these places?
How do these functions work together? How do they evolve over time and in the future? How do these functions work together? What role does financial infrastructure play in this context? One of the aims is to essentially break down financial products. If one thinks about cars, certain quite sophisticated, technologyintensive parts come from suppliers in different places, and all these functions work together in a value chain. The aim is to effectively dissect financial products in a similar way. An area that has developed rapidly
technology. This opens up new opportunities to gain and exploit data and information, which is what drives the financial services industry. “Outside established financial centres, new tech-driven ecosystems are developing, that both feed established financial centres but also point to changes in financial geographies. Examples include the rise of Berlin, Stockholm or Tel Aviv. This is a new development we are seeing,” outlines Dr Dörry. “It is common to talk about financial flows around the globe when considering the role of these financial centres, but it’s actually information that is flowing. New technology helps facilitate transactions.”
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Telecommunications innovations and the increasing digitization of payments are however not proving as disruptive as initially expected. A PhD researcher in the project, Mr Gary Robinson, is looking, for example, at global payment infrastructure such as SWIFT (Society for Worldwide Interbank Financial Telecommunication) and correspondent banking to test this point. “What were the professionals in this area doing before they became involved in Fintech? And how does this knowledge shape the evolution of FinTech sectors? Those are some of the questions we’re looking at,” says Professor Derudder. Researchers are also investigating the major financial centres themselves, where the same big banks commonly have a presence. Many banks and other actors in the financial sector tend to co-locate in major cities like London, which are established as globally important locations in the industry, as well as in other less well-known financial centres. “Co-location of financial organisations, institutions and infrastructures are factors that define financial centres in general, not just the big ones like London. However, what they do can be different,” says Dr Dörry. One major factor here is access to people with the skills required to work in different areas of financial services. “Competitors tend to colocate because they need the same generic skills, tools, or surroundings. It’s not just about access to airports and other infrastructure, but also elements that make up key urban environments,” outlines Professor Derudder. The human skills available in locations like London and New York are a major part of their attraction to banks, but more subjective factors are also at play. One of these is the dynamism, excitement and glamour associated with major urban centres. “The financial eco-system is
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embedded in the urban fabric of larger cities. In the aftermath of Brexit, we have seen mainland European cities promoting themselves in terms of their attractiveness as a city to try and attract new business,” points out Dr Dörry. It is however also possible for smaller cities like Luxembourg to attract more business, while entirely new financial centres have also emerged in the recent past. “We see new international financial centres emerging in China for instance, while Dubai has grown rapidly,” says Professor Derudder. The typical clustering in these cities might be described as the financial services complex, the lawyers, accountants and other business services that play an important role in the industry. Some of the biggest services firms are developing a portfolio that straddles all of these different areas rather than specialising in one sector. “In the past, many household names in the services industries were attached to a specific sector, but
if you think about the bigger companies now, they often offer a portfolio of services. They may offer legal and accounting advice, and so on,” outlines Professor Derudder. While many of these companies have a presence in financial centres across the world, they may offer different services in each, as the regulatory regime is an important consideration. “What can and can’t you do in these locations? And what implications does it have for the well-being of our societies when some countries ‘sell’ their sovereignty to cash in on business fees and benefit from global tax engineering?” asks Dr Dörry. The regulatory regime determines which skills can be used in a certain location and which can’t, which comes down to how strictly European or international regulations are applied by the domestic authorities in the country concerned. One example Dr Dörry points to is trust law. “This can be
Cluster heatmap of 241 cities (rows) and 175 producer service rms (columns) based on correlation coe cients. A high-resolution version of this slide for use with the Virtual Microscope is available as eSlide: VM05653. T. Storme, et al. Computers, Environment and Urban Systems 76 (2019) 57–68.
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STABILISING AN UNSTABLE INDUSTRY: THE ROLE OF AGENCY IN INTERCONNECTING INTERNATIONAL FINANCIAL CENTRES
Project Objectives
The objective of this research project is to better comprehend the dynamic/stability duality of the system of ‘international financial centres’ (IFCs) through an analysis of several ‘transnational social layers’: networks of financial centres, networks of financial firms and their products, and networks of leading financial professionals. By adding an agency perspective to the presently-dominant ranking interpretations of how IFCs come into being and jockey for position within global financial business flows, we help move our understanding of stability and dynamics among IFCs beyond broad-sweeping narratives of path dependence and crisis.
Project Funding
This project is funded by the The Research Foundation – Flanders (FWO) and the Luxembourg National Research Fund (FNR).
Contact Details
Sabine Dörry, Research Fellow, LISER and Adjunct Associate Professor, University of Luxembourg, Luxembourg Institute of SocioEconomic Research (LISER), Maison des Sciences Humaines 11, Porte des Sciences, L-4366 Esch/Belval, Luxembourg T: +35.2585855231 E: sabine.doerry@liser.lu W: https://liser.elsevierpure.com/en/ persons/sabine-dörry Prof. dr. Ben Derudder, Research Professor in City Science Director, Leuven Urban Studies Institute (LUSI) Public Governance Institute, KU Leuven Parkstraat 45 bus 3609, B-3000 Leuven, Belgium T: +32.16322129 E: ben.derudder@kuleuven.be W: https://soc.kuleuven.be/io/personeel/ staf/00069149/ Prof. Ben Derudder
Dr Sabine Dörry
Dr Sabine Dörry is an economic geographer working at the Luxembourg Institute of SocioEconomic Research. She is also a founding and board member of FINGEO – the Global Network on Financial Geography. Professor Ben Derudder is an urban geographer working at KU Leuven’s Public Governance Institute. He is also an associate director of the Globalization and World Cities (GaWC) research network.
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both a highly useful and a pretty harmful instrument. In the latter sense, it helps shield private wealth so that it will not contribute to the creation of public wealth but deepens social and spatial inequality,” she says. Trust law was initially developed in common law countries like the UK, but has since spread more widely, and it affects the nature of the financial services industry in those locations. “This is just one example to highlight the importance of law firms and legal skills, the use of which is encouraged by private law in some places and not in others. New industries have developed over time around new services based on trust law. This makes the financial industry stable but not necessarily societally useful and sustainable.”
Co-locating companies The more immediate aim in the project is to look at where financial firms are co-located, taking these various considerations into account. While Dr Dörry’s expertise lies primarily in qualitative analysis, Professor Derudder focuses more on large-scale quantitative analysis. “The idea in the project is to bring those two perspectives together,” he explains. The evidence base in the project includes large-scale matrices showing where firms are located, with researchers looking for patterns in the data (as illustrated by the heatmap image on the preceding page). “We see all sorts of geographic patterns emerging. Some financial services firms pursue a European strategy for example, while others are quite global. Then you look at the Chinese firms that are really looking to enter African markets, but also the big international financial centres.” This analysis shows where companies are located and what kinds of services they offer, then the next step is to investigate how they work together. Building on Professor Derudder’s analysis, Dr Dörry has spent time in eight different financial centres, aiming to build a deeper picture of how the financial eco-system has evolved. “What kinds of locational assets do they build together in order to attract what kinds of services? Then we can understand much better how a location has developed over time, or why it has developed in a certain direction. Some - often small - countries have essentially started by selling their sovereignty to ‘letter box’ companies and benefited from the emerging Euromarkets. But some have since developed into sophisticated financial centres. However, they build on their history when countries started to cooperate in designing law that is often not only drafted by the international law firms, but then also used by their clients who gratefully use these new ‘opportunity’ spaces.” A financial company typically looks at the costs and benefits of operating in a
certain location, and the legal and regulatory frameworks are important conditions. “You need to look at not only what your employees like, but also what serves your purposes best,” continues Dr Dörry. The financial industry is very much international in nature, and in some cases major organisations are regulated from what might be considered unlikely locations. SWIFT is regulated by the Belgian National Bank for example. “What are the implications?” asks Professor Derudder. Part of the reason for this lies in geo-political factors, which relates to one of the project’s major findings. “We don’t offer policy recommendations because ultimately there’s a lot of politics behind this, which is what we are trying to show. It is possible to identify best practice, but it will be best practice for a specific party. You will maximise the benefit for somebody, whether it’s financial services firms or governments.” There is no single ideal approach to regulating the financial services industry, as ultimately this depends on the philosophical outlook of those with responsibility and their priorities. The financial sector is undergoing rapid change as new technologies are introduced, which has led to some stimulating debate. “We have had some very interesting discussions about what financial innovation actually is - it is often tightly interwoven with legal innovation, or technological innovation. We see that finance as an industry is always among the first movers in terms of adopting new technology, and every financial innovation has its own spatial implications” says Dr Dörry. The project’s research could therefore open up new avenues of investigation. “Our research shows that what happens in financial centres directly and indirectly influences people’s work and way of life, but also how cities are built, for example. It helps explain the vast differences in wealth between the world’s rich and poor. A better understanding of the financial system and the importance of financial centres - specifically in their relationship with one another - in the FINWEBS project encourages further research into global finance. Of high importance is the growing sustainability imperative and how financial centres could shift their strategies to enter a truly green and sustainable future.”
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