The City of London and its role as a financial centre

Automated Teller Machines). Cash machine cards have greatly improved

customers’ access to cash. All retail banks and building societies

participate in nation wide networks of ATMs. About two thirds of cash now

is obtained through Britain’s twenty one thousand ATMs. .A lot of them are

located different places at supermarkets, for instance.

Many banks offer electronic payment of cheques, telephone banking, under

which customers use a telephone to obtain account information, make

transfers or pay bills. Other innovations include computer-based banking

(through home computer) services over Internet and video links.

Merchant banks.

The traditional role of merchant banks was to accept bills of exchange, to

provide funds for trade and also to raise capital to British companies

through the issue of bonds and other securities. These activities continue,

but the role of Britain’s merchant banks has diversified enormously in

recent years. Although they are called “banks” they are more involved in

providing a range of professional services, such as corporate finance and

investment management, than in lending money.

Building societies.

Building societies are mutual institutions owned by their savers and

borrowers. They have traditionally concentrated on housing finance, long-

term mortgage loans against property - most usually houses purchased for

occupation. Services have been extended into other areas, including

banking, investment services and insurance. The Societies are one of the

main places were people deposit their savings - around 60% of adults have a

building society saving accounts. Building societies offer a variety of

accounts with interest rates related to the time for which a saver is

prepared to tie up his money. So they are major lenders for house

purchases. Four of the largest Societies are planning to become banks. The

largest Societies, the Halifax, Abbey National and Nationwide owe 45% of

the total assets of the movement.

National Savings Bank.

The National Savings Bank is run by the department of National Savings. It

provides a system of depositing and withdrawing savings at twenty thousand

post offices around the country or by post. The National Savings Bank does

not offer lending facilities. Its deposits are used to finance the

Governments public sector needs.

Investing Institutions.

The investing institutions are those which collect savings and invest them

into securities market and other long-term assets. The main investment

institutions are insurance companies, pension funds, unit trusts and

investment trusts. Together they make a vast resource of funds which are

invested in securities and other assets. They own around 58% of British

shares. The British insurance industry is highly sophisticated and serves

millions of policyholders in Britain and overseas. Policyholders include

governments, companies and individuals. The British insurance is the forth

largest in the world and in proportion to its GDP is the highest in any

country. There are 2 broad categories of insurance: long-term insurance for

many years, such as life insurance, permanent health (medical) insurance;

and general insurance for a year or less, which covers risks of damage,

such as loss of property, accidents and short-term health insurance. In

1995 there were about 830 authorized to carry on insurance business in

Britain. The industry as a whole employs some 207.000 people, plus about

126.000 are employed in activities related to insurance.

Lloyd’s is an incorporated society of private insurers in London.

Originally it dealt with marine insurance. Today it deals with other

classes of insurance, today it deals with other classes of insurance. Long-

term life and financial guarantee business is not covered. Insurance

brokers as intermediaries are a valuable part of the insurance market.

Lloyd’s insurance brokers play an important role in the Lloyd’s market.

Institute of London Underwriters was formed in 1984 as an association for

marine underwriters. Today it provides a market where member insurance

companies transact marine, energy, commercial transport and aviation

insurance business. The Institute issues combined policies in its own name

on risks which are underwritten by member companies. About half of the 58

member companies are branches or subsidiaries of overseas companies.

Pension Funds.

Pension Funds collect savings Pension Funds collect savings from

occupational pension schemes and personal pension schemes. Pension

contributions are invested through intermediaries in securities and other

investment markets. Pension fund have a become a major force in securities

markets because they hold about 28% of the securities listed on the London

Stock Exchange. Total Pension fund assets are very big. To protect them the

Pensions Act was introduced in 1995 to increase confidence in the security

of the funds.

Investment trusts and unit trusts.

Both investment trusts and unit trusts offer investors the opportunity to

benefit from pools investments, although their respective structures are

somewhat different. Assets have grown considerably in the last few years.

So individuals are attracted by the possibility to invest rather small

amounts either on a regular basis, usually monthly, or in a lump sum.

Investment trusts companies are companies which are listed on the London

Stock Exchange and must invest mostly in securities for the benefit of

their shareholders. The trusts are exempt from tax on money which they get

within the trusts. Some trusts specialize in particular geographical areas

or in particular markets. At the end of June 1996 there were about 350

investment trusts companies listed on the London Stock Exchange.

In unit trusts the investors’ fund are pooled together but are divided into

units of equal size. Unit trusts are open ended collective funds where the

funds are managed by management groups. The unit trust sector has grown

rapidly in recent years. Nearly three million people are estimated to have

holdings in unit group.

Specialized institutions.

The origin of the London Stock Exchange goes back to the coffee houses of

the 17th century, where those who those who wished to invest or raise money

bought and sold shares of joint-stock companies. Brokers later opened their

own subscription rooms and in 1773 this was named the Stock Exchange.

During the 19th century the Stock Exchange developed as the demand for

capitol grew with Britain’s Industrial Revolution. The Exchange also

financed the construction of railways, bridges and dams across the world.

Today it is one of a number of highly organized financial markets of the

City. It provides trading platform and the means of raising capital for

British and foreign companies, Government securities, eurobonds and

depository receipts. Official list is the Exchanges main market, while AIM,

the Exchanges new market is for smaller rapidly growing companies. It

opened in 1995. Companies which apply for a listing on the Exchange must

provide a full picture of their operations, i9ncluding their financial

record, management and business prospects. If a company wants to join AIM

the rules are less strict. Such companies include multimedia and high

technology business.

Today the Exchange has moved away from face-to-face dealing on the trading

floor to system of dealing from member firms’ offices. The quotations are

displayed on electronic screen. Before 1986 only British companies were

allowed to operate. In 1986 deregulation, known as “the Big Bang” allowed

any foreign financial institution to participate in the London money

market. Other changes involved a system under which negotiated commissions

were allowed instead of fixed rates and dealers are permitted to trade in

securities both as principals and as agents. Traditional retail

stockbrokers are facing growing competition from operations running by

large banks and building societies.

The Exchange has its administrative center in London, with regional offices

in Belfast, Birmingham, Glasgow, Leads and Manchester.

Many companies raise new capital on the London money market. The quiet-

edged market, that is the market of Government shares, allows the

Government to raise money by issuing stock through the Bank of England.

The Exchanges now going through a further period of change which has been

described as the most significant period since “The Big Bang”.

Money markets.

London’s money markets channel wholesale short-term funds between lenders

and borrows. These operations are conducted by all the major banks and

financial institutions. The Bank of England regulates the market. There is

no physical market place; negotiations are conducted mostly by telephone or

through automated dealing systems. The main financial instruments are CDs

(Certificates of Deposit), bills of exchange, Treasury and local authority

bills and short-term Government stocks.

Financial Futures and Traded Options.

Financial futures are legal contracts for the purchase or the sale of

financial products, on a specified future date at a price agreed in the

present. Trading and financial futures developed out of the numerous

futures markets in commodities which originate from London’s position as a

port and from Britain’s need to import food and raw material.

Options are contracts which give the right to buy or sell financial

instruments or physical commodities for a stated period at a predetermined

price.

Financial futures and options are traded on the London International

Futures and Option Exchange (LIFFE) which was established in 1982..

Commodity Exchanges

Britain remains the principal international center for transactions in a

large number of commodities, though the consignments themselves never pass

through the ports of Britain. The need for close links with sources of

finance, shipping and insurance services often determines the locations of

these markets in the City of London. There are futures markets in cocoa,

coffee, grains, rubber, sugar, pigmeat, potatoes there.

Gas, oil for heating and petroleum are traded through the International

Petroleum Exchange, Europe’s only energy futures exchange.

Copper, lead, zinc, nickel, aluminum, aluminum alloys and tin are treaded

through the London Metal Exchange (LME), the world’s largest non-ferrous

base metals exchange.

The Baltic Exchange is the world’s leading international shipping exchange.

It contributed to 292 Mln pounds in net overseas earnings to Britain’s

balance of payments in 1995. Baltic dealers handle more than a half the

world’s bulk cargo, transportation of oil, ore, coal and grain. All

Britain’s agricultural futures markets are operated from the Baltic

Exchange and physical trading and commodities is also carried out there.

Chapter 4.

The International Role of the City of London in the World Monetary and

Currency Fields.

A recent comprehensive study of four world cities - London, Paris, New York

and Tokyo - confirmed many strength of London and described it as possibly

the most international of all world cities. The study said that London and

New York are the only two pre-eminent international financial centers with

advantages over other cities. One city that is emerging as a financial

center of the Asian continent is Tokyo.

Strengths of London include:

1. The concentration of business and service functions - among them support

services such as legal services, accountancy, and management consultancy.

2. Efficient world-wide communication links.

3. A favorable position in the time zone between the United States and Far

East.

4. A stable political climate.

5. World-class service industries including hotels, restaurants, theaters

and other cultural attractions.

Britain and the City of London as a financial symbol, encouraged

international liberalization in financial services. It played a major role

in negotiating agreements closely connected with GATT (General Agreement of

Tariffs and Trade) as well as negotiations within the Organization for

Economic Cooperation and Development. Briefly, apart from world-wide

insuarence and banking strength, Britain’s important features include:

. Its foreign exchange market,. whose daily turnover of 294 Mln pounds in

1995 represented 30% of Global turnover and was more than the turnover of

New York and Tokyo combined.

. The London Stock Exchange which is the biggest trade center for overseas

equities in the world; it makes 55% of global turnover.

. The world’s second largest fund management center, after Tokyo.

. One of the world’s biggest markets in financial futures and options.

. One of three largest international bond centers in the world.

Britain’s international role in the world monetary and financial fields

became particularly in the late 1980s.

Deregulation has been the main catalyst in increasing the City’s role as an

international financial center. Fundamental reforms of 1986, known as Big

Bang affected the London Stock Exchange tremendously, because any foreign

financial institution can now participate in the London money market. “What

we were trying to do”, in the words of a former Deputy Chairman of London

Stock Exchange, “ was to create a new market, not one just oriented toward

the UK, but one that can become international”. It was intended to secure

London as the leading financial center of Europe, and the third in the

world alongside New York and Tokyo.

Many foreign banks and finance houses tried to profit from the

deregulation, some by direct competition and others by buying long-

established City enterprises. Before the Big Bang all City stockbroking

firms were British. By 1990 one hundred fifty four out of four hundred and

eight were foreign owned. The main investors in British stockbroking are

the United States, Japan and France (also see Chapter 2, The Stock

Exchange).

British banks, insurance companies, building societies, and other money

lenders often prefer to invest in other areas, rather than industry, in

contrast with Britain’s competitors, for example Germany and Japan, where

the level of industrial development is higher.

Britain strongly supports the removal of national regulations and exchange

controls which restrict the creation of common market in financial

services. London is a major center for international banking. Altogether

five hundred sixty one foreign banks are represented in Britain. They

employ about 40.000 people and provide different services in many parts of

the world.

Japan and the United States are the two countries with most banks

represented in London (see the table attached). Assets/liabilities of

overseas banks in Britain have doubled in the last ten years. Overseas

banks have a very high proportion of their operations in foreign currency.

Since the end of 1920s the Moscow Narodny Bank has been operating in London

to deal with transactions with the Soviet Union and Russia now.

A number of British banks have their head offices in Britain but operate

mainly abroad. Standard Chartered is the major bank in this sector: it has

a network of over 600 offices in more than 40 countries and employs over

25.000 people. Standard Chartered’s activities are concentrated in Asia,

Africa and Middle East.

British banks are developing innovative banking services in their overseas

operations. For example Standard Chartered has opened the first fully

automated branches in Hong Kong and Singapore. Satellite dishes have been

installed in Barclays’ branches in Zimbabwe

London and Tokyo are the main world centers for eurocurrency dealings. The

euromarket began with eurodollars - US Dollars lent outside the United

States - and now has developed into a powerful market of currencies lent

outside their domestic marketplace. Transactions can be carried out in

eurodollars, eurodeutschmarks, euroyen, and so on. So, euroloans are short-

term trances (three to six months) given by banks at the LIBOR rates.

Eurobonds are issued for periods of five to twenty years in currencies

other than that of the issuing country.

The London International Futures Exchange trades on the floor of the Royal

Exchange building. Over 200 banks and other financial institutions, both

British and foreign, are members of the market. In fact over 70% are

overseas-owned. They make contracts in British, German, Italian, and

Japanese Government bonds.

In 1995 LIFFE announced new linking agreements with the Tokyo International

Financial Futures Exchange and Chicago Board of Trade. In 1996 LIFFE merged

with the London Commodity Exchange, which is Europe’s primary market for

trading futures and options contracts in cocoa, coffee, sugar, wheat,

potatoes.

Anyone may deal in gold but, in practice, dealings are largely concentrated

in the hands of five members of the London gold market. Around 60 banks and

often financial companies participate in the London gold and silver

markets. Trading is done by telephone and electronic communications links.

The five members of the London Bullion Market Association meet twice daily

to establish a London fixing price for Gold and this price is a reference

for world-wide gold dealings.

Chapter 5.

Recent Financial Institutions (the London Club, Britain in the IMF, British

Banks in Russia).

The International Monetary Fund (IMF) and the London Club can not be

properly described as recent institutions but it is important to note their

recent activities in the light of the financial problems in Russia.

The IMF was founded in 1944 to secure international monetary cooperation

and stabilize exchange rates. Operating funds are subscribed by member

Governments according to the volume of their international trade, their

national income and their international reserve holdings. Members with

temporary difficulties in their international balances of payments may

purchase or get credits form the IMF of the foreign exchange they need at

fixed rates if they meet the required conditions. Russia applied to the IMF

for credits.

Great Britain plays an important role in the IMF. On the 10th of September

1999 the Сhancellor of the Exchequer Gordon Brown was appointed to the

Interim Committee of the IMF. The Committee was established in 1974 to

advise the IMF on the management of the international monetary system as

well as on dealing with any sudden shock to the world money system. The

Chancellor will lead discussions on the reform of the Interim Committee

after the proposals of the G7 Finance Ministers.

There will be also discussions on reforms to involve the private sector in

presenting the world financial prices. It is the aim of IMF to relieve

third world debt to avoid large-scale financial crises.

Among the recent developments it is important to mention the choice of

London as the location of NASDAQ-Europe. In his speech on the 5th of

November 1999, the Chancellor of the Exchequer Gordon Brown it was

excellent news for the City of London to launch a joint venture to create a

pan-European security market.

Gordon Brown said: ”NASDAQ’s decision to locate its European exchange here

represents a massive vote of confidence in the City. NASDAQ - Europe will

strengthen the UK financial services industry and reinforce London’s

position as one of the worlds’ top international financial centers”. Mr.

Brown added, “NASDAQ’s presence here will be good for the wider economy

too, not just in the UK but Europe as a whole. Job creation and economic

growth depend on efficient capital markets sending funds to businesses to

finance their expansion”.

An important move in the European monetary life was the introduction of a

single European currency, the Euro, on the 1st of January 1999. A separate

protocol recognizes that Britain is not obliged to join the currency

without a separate decision by British Government and Parliament.

So far the Bank of England has not voted to adopt the single currency. On

the 6th of September 1999 Mr. Cook , the Foreign Secretary, stated that if

the Euro proves to be a success, it would be in Britain’s interest to join

it. Britain will first have to test whether there is enough flexibility in

British economy and if the Euro will promote strong international

investment and boost British financial services industry.

According to the decision of European Union (EU) Heads of Government single

currency notes and coins will be introduced at the beginning of 2002 at

latest.

The London Club set up in the 1980s under an agreement in London, comprises

over 600 big commercial banks whose credits are not covered by government

guarantees or insurance. There is a steering committee of the Club which

operates between the Club’s sessions. The Sessions are held at the request

of the debtors in different cities of the world.

After the collapse of the USSR, the Soviet Union bank for Foreign Economic

Affairs owed the London Club a total of over 32 Bln Dollars. Under the

latest decision on restructuring the Russian debt it was agreed in February

2000 that the debt would be restructured. Nearly one third of the total

amount will be written of and Russia will be allowed to have a grace period

of seven years, during which it will pay only reduced interest rates on the

remaining sum. In return, the Russian Government undertakes the

responsibility for the debt and would be considered defaulting if it fails

to meet the stated conditions.

Although the London Club is not entirely a British entity the title speaks

for the significance of the city of London.

The world-wide network of British banks is not directly represented on

Russian market. Operations available are carried out only through the

branches of British banks based in other cities of the world.

Conclusions.

1. Although historically the heart of the financial services sector in

Britain was located in the “Square Mile” of the City of London, and this

is broadly the case now, financial institutions have moved outside the

area all over the country.

2. The City of London is concentration of British financial power which

makes London an angle of the New York-Tokyo-London triangular.

3. Though Great Britain is still a leading industrialized nation and a

member of G7 group it real power and international influence centers

around its financial activities.

Reference list.

1.David McDowall, Britain in close-up/Longman Singapore Publishers Pte Ltd.

2.Britain’s Banking and Financial Institutions/Reference Services, Central

Office of Information, London.

3. Angela Fiddles, The City of London (the historic square mile).

4. Talking Points on Britain’s Economy/October 1999, December 1999.

5. Банковское дело, выпуск №12, 1998г.

Appendix :

Table 1 .

Net Overseas Earnings of Britain’s Financial Institutions

| |Million |

| |Pounds |

|Banks |6,188 |

|Securities Dealers |1,658 |

|Commodity traders. Bullion dealers |556 |

|and export houses. | |

|Money Market Brokers |112 |

|Insurance Institutions |5,952 |

|Pension Funds |2,044 |

|Unit trusts |724 |

|Investment Trusts |383 |

|Fund Managers |425 |

|Baltic Exchange |292 |

|Lloyd’s Register of Shipping |57 |

|Finance Leasing |40 |

|Non-specified institutions |1,962 |

|Total |20,393 |

Table 2.

Notes in circulation.

| |Value of notes in |No of notes issued by |

| |circulation end February |denomination in year to end|

| |1996 (million) |February1996 (million) |

|1 pound |56 |- |

|5 pounds |1,067 |336 |

|10 pounds|5,688 |575 |

|20 pounds|8,579 |326 |

|50 pounds|3,104 |43 |

|Other |1,154 |- |

|notes | | |

|Total |19,648 |1,280 |

Source : Bank of England.

Table 3.

Major British Banks 1995.

| |Assets |Market |Staff|Branches |Cash |

| |Liabilities|Capital | | |dispensers |

| |(Mln |(Mln | | |and ATMs |

| |pounds) |pounds) | | | |

|Abbey |97,614 |10,765 |16,30|678 |1,267 |

|National | | |0 | | |

|Bank of |34,104 |4,095 |11,30|411 |463 |

|Scotland | | |0 | | |

|Barclays |164,184 |18,407 |61,20|2,050 |3,020 |

| | | |0 | | |

|Lloyds TSB |131,750 |25,496 |66,40|2,858 |4,346 |

| | | |0 | | |

|Midland |92,093 |39,658 |43,40|1,701 |2,282 |

| | | |0 | | |

|National |166,347 |13,548 |61,00|2,215 |2,998 |

|Westminster| | |0 | | |

|Royal Bank |50,497 |4,750 |19,50|687 |1,009 |

|of Scotland| | |0 | | |

|Standard |38,934 |7,757 |1,100|1 |- |

|Chartered | | | | | |

Figure 1.

Major Banks lending to British Residents December 1995.

[pic]

Table 4.

Largest Building Societies.

|Rank by Group |Rank After Flotations |Group Assets (million|

|Assets |and Mergers in 1977 |pounds) |

|1. Halifax. |- |98,655 |

|2. Nationwide. |1 |35,742 |

|3.Woolwich |- |28,005 |

|4. Alliance & |- |22,846 |

|Leicester | | |

|5. Bradford & |2 |15,658 |

|Bingley | | |

|6. Britannia |3 |14,916 |

|7.National & |- |14,133 |

|Provincial | | |

|8.Northern Rock |- |11,559 |

|9.Bristrol & West|- |8,589 |

|10. Birmingham |4 |6,725 |

|Mdshires | | |

|11. Yorkshire |5 |6,412 |

|12.Portman |6 |3,513 |

|13.Coventry |7 |3,379 |

|14.Skipton |8 |3,037 |

Table 5.

Overseas Banks in Britain

(Main Countries Represented).

|Country of |Branches of|British |Represen|Other|Tota|

|origin |an Overseas|Incorporated |tative | |l |

| |Bank |Subsidiary of an |offices | | |

| | |Overseas Bank | | | |

|France |16 |8 |23 |- |47 |

|Germany |19 |5 |4 |- |28 |

|Italy |15 |1 |28 |- |44 |

|Japan |28 |6 |15 |4 |53 |

|Switzerland |9 |2 |17 |- |28 |

|United |23 |9 |11 |6 |49 |

|States | | | | | |

|Other |153 |41 |111 |7 |312 |

|countries | | | | | |

|Total |263 |72 |209 |17 |561 |

Source: Bank of England.

Table 6.

General and Long-term Insurance Business 1985 - 1995.

[pic]

General Insurance net premiums.

[pic]

Table 7.

Growth in Unit Trusts and Investment Trusts.

[pic]

Definitions.

|Assets - |anything owned by an individual, company, legal |

| |body or government which has a cash value. |

|Big Bang - |a system of major changes which brought |

| |deregulation to the London Stock Exchange in 1986.|

|Bill of |an officially signed promise to pay to the |

|Exchange - |receiver of the bill, the stated at the fixed |

| |time. |

|Bond - |a certificate issued by the borrower as a receipt |

| |for a loan usually longer than 12 months; it |

| |indicates the interest rate and the date of |

| |repayment. |

|Eurobond- |an international certificate issued by the |

| |borrower for a long-term loan (from 5 to 15 years)|

| |in any European currency but not in the currency |

| |of the issuing bank. |

|Securities- |general term for stocks and shares of all types. |

|Exchange- |a market for the toll purchase of goods or |

| |securities. |

|Stock |a market for short or long term transactions in |

|Exchange- |securities . |

|Commodity |a stable market for wholesale transactions in |

|Exchange- |preferably commodities and raw materials |

|Money Market- |a market for money instruments with a period of |

| |validity of less than one year. |

|Factoring- |a business activity in which a company takes over |

| |the responsibility for collecting the debts of |

| |another company. |

|Fund |managing investors’ funds on their behalf or |

|Management- |advising investors on how to invest their funds. |

|Financial |legal contracts for the sale or purchase of |

|Futures- |financial products on a specified future date, at |

| |the price agreed in the present. |

|Option- |A contract giving the right to buy or sell |

| |financial instruments or goods for a stated period|

| |at a stated price. |

|The London |The international gold and silver market in London|

|Bullion Market|where trade is done by a telephone or electronic |

|- |links. |

|Hedge |The purchase or sale futures contract as a |

| |temporary substitute for a transaction to be made |

| |at a later date |

|Open-Ended |A fund without a fixed number of shares |

|Fund- | |

|Quite-edged |Loans issued on behalf of the Government to fund |

|loans - |its spending. |

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