The rise of international financial centres in bank-based and market-based financial systems

Chun Lok Kris Li,Simon Xiaobin Zhao

doi:10.21511/bbs.13(4).2018.15

Chun Lok Kris Li, Simon Xiaobin Zhao

Open Access

https://doi.org/10.21511/bbs.13(4).2018.15

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Abstract

“International Financial Centres” (IFCs) such as London or New York are one of several contributing factors toward the continued economic success of their respective countries in the twentieth-century. Other countries have attempted to create their own IFCs with mixed successes. This study examines factors that might predict the appearance of IFCs and the differences in financial scale. Of particular interest is the debate between ‘bank-based’ versus ‘capital-based’ financial systems and how it impacts the growth and success of IFCs. Results suggest that bank-based systems are marginally more effective at promoting and benefitting from IFCs. Stronger financial market regulations are also positively associated with the growth of IFCs and the resulting benefits that they provide to the rest of the economy. Together, this suggests that the optimal policy mix to promote IFCs may involve some degree of government involvement beyond strictly maintaining free and fair financial markets for the private sector.

Highlights

Financial centres are perceived to bring good jobs, high incomes, and concentrations of capital to a country (Cassis, 2006)
Stronger financial market regulations are positively associated with the growth of IFCs and the resulting benefits that they provide to the rest of the economy
The accumulation of total banking assets (TBA) is more important for a city’s development than its total market capitalization (TMC). This lends support to the “banking-based” system argument that, for most economies, strengthening the banking system is more important than building up an open stock exchange

Summary

Introduction

Financial centres are perceived to bring good jobs, high incomes, and concentrations of capital to a country (Cassis, 2006). Cities like Hong Kong, London, New York, São Paulo, Sydney, and Tokyo (Sassen, 1991) are commonly-cited examples to emulate. This is especially true for emerging-market economies with some progress, as they shift away from the basics to the development of a financial sector and a financial centre that serves as a focal point for the industry to agglomerate (Dorrucciet et al, 2009). The theory is that the US, and to a lesser extent the UK, have structured their financial systems towards the internal and external capital market, whereas Japan and Germany rely more heavily on an internalized banking system to redistribute funds. Financial centres were mentioned in passing perhaps because these four countries historically housed the most developed financial centres

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