Major International Financial Centre Research Articles

Development of the UAE financial system in a rapidly changing economic landscape

The UAE financial system is the country’s leading non+hydrocarbon sector which has shown good growth in the post–pandemic period. The country’s ability to become a leader in innovative technology not only among the GCC countries but also among the countries in the MENA region is beyond doubt. After the global financial crisis, which also affected the wealthy emirates of Dubai and Abu Dhabi, the UAE government took the vector to create a risk–oriented innovative financial system. The creation of major international financial centers, such as Dubai International Financial Center (DIFC) and Abu Dhabi Global Market (ADGM), was the logical concept for creating the above system. Islamic financial institutions represented in the UAE operate within the framework of clear rules and standards that have been implemented by supervisory and regulatory authorities, precisely to build high–quality and transparent relationships between counterparties not only within one country, but also at the international level.

Cross-border workers in the Greater Region of Luxembourg and financial instability: a non-linear approach

ABSTRACT This article aims to study the interactions between cross-border workers from the Greater Region of Luxembourg (compared to resident workers) and financial instability. Luxembourg, located in the heart of the Greater Region, is a major international financial centre, one of the most significant aspects of which is the phenomenon of cross-border or commuting work. Interrelationships between financial fluctuations, the real economy and employment seem to operate especially in times of crisis or post-crisis, and to affect more particularly cross-border workers, whose recruitment is facilitated by service and financial intermediation companies. We propose to evaluate these interrelationships with an asymmetric non-linear ARDL (Auto Regressive Distributive Lags) staggered delay autoregressive model, which validates the predictive power of financial indicators to explain fluctuations in cross-border and resident workers.

The international transmission of monetary policy through financial centres: Evidence from the United Kingdom and Hong Kong

This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the USA, euro area and Japan, on banks’ domestic lending behaviour. Using individual bank-level data we find that financial connections – in the form of lending to and borrowing from the country which changes monetary policy - play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the UK. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.

Post-Brexit Britain and the pay culture: challenges and opportunities

This paper examines the impact of Brexit on financial services regulation in relation to three areas linked to executive remuneration. They are: the bonus cap; the clawback of pay; and the level of disclosure required by shareholders with regard to details of directors’ remuneration. It will be argued that legally Brexit will have little impact on any of the three areas. UK legislation has already incorporated a great deal of EU legislation. The status quo of retaining such legal restrictions seems sensible in light of public sentiment towards unfairness in executive compensation and uncertainty towards the Brexit negotiations. Nevertheless, London faces stiff competition from other major international financial centres in a post-Brexit era. The loss of single passporting rights is also encouraging major banks to invest in other European financial centres. Brexit creates opportunities too. With the integration of digital technology, it is possible to create convenient platforms where investors can access reports on executive remuneration.

The International Transmission of Monetary Policy Through Financial Centres: Evidence from the United Kingdom and Hong Kong

This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.

The International Transmission of Monetary Policy Through Financial Centres: Evidence from the United Kingdom and Hong Kong

This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.

A Study on the Practical Ways of Implementing a Street-Wide BCP Exercise in the Banking Industry

This paper aims to determine the most practical method for implementing a Street-Wide Exercise for the banking industry in Japan. There are similar BCP exercises occurring in Singapore, called Industry-Wide Exercises, conducted by the Monetary Authority of Singapore. This paper defines an Industry-Wide Exercise as a BCP exercise involving only banks, while a Street-Wide Exercise involves banks along with other critical interested parties, such as exchanges, the police, the fire department, lifeline vendors, and government offices. For the past 10 years, major international financial centers such as New York, London, and Singapore have conducted Street-Wide Exercises involving both banks and critical interested parties. However, the BCP Exercise for the banking industry in Japan still only involves banks, a policy that should be revisited. This study conducts an analysis from various angles, including ISO 22398 (the ISO’s approved framework for BCP exercises) to identify potential solutions. Additionally, it proposes a new type of BCP exercise, which is a blend of Industry-Wide and Street-Wide Exercises as an intermediary solution, called a Focused-Street-Wide Exercise, involving a limited number of banks and interested parties.

Frontier Finance

A growing community of long-time-horizon institutional investors that includes sovereign wealth funds, pension funds, and other beneficiary institutions located in cities outside of the major international financial centers (IFCs) is pushing back against the misaligned incentives and power asymmetries present in the for-profit asset management industry. This expanding group of beneficiary institutions, which we define as frontier investors, is retaking responsibility of the end-to-end management of assets through insourcing and direct investing, which allows them to bypass the markets and service providers in IFCs. This article elucidates this organizational cum geographical change, which we call frontier finance. In setting the theoretical context, this article presents a conceptual model of frontier places vis-à-vis the market for global financial services and the market for financial assets at the global scale. This is followed by a presentation of field studies of a significant cross section of large beneficiary institutions from around the world in their attempts to insource asset management. Notwithstanding the significance of change at the level of some individual organizations, there is an insufficient critical mass of organizations at this stage successfully implementing change such that the conventional functional and spatial structure of asset management faces an existential threat and that the dominance of IFCs in the allocation of global flows of capital is in doubt. This confirms the enduring forces of centralization in global financial markets and the importance of agglomeration economies in the market for financial services.

Getting Closer to the Action: Why Pension and Sovereign Funds are Expanding Geographically

There are three major trends manifesting in the business of institutional investment today. First, a growing number of pension and sovereign funds are moving towards a more active role in the investment process by taking a dynamic role in external manager selection and monitoring, or by insourcing asset management functions that would traditionally be managed by external parties. Second, there is a growing number of large institutional investors located far from the major international financial centers. Third, institutional investors are increasingly looking to new markets, industries, and asset classes to generate returns in a low-growth and low-yield environment. The combination of these trends gives rise to some geographic and organizational complexities for these investors, such as accessing talent, local knowledge, and aligned investment opportunities. In an attempt to resolve some of these issues, some investors have decided to launch satellite offices in major international financial centers and/or regional commercial centers at home and abroad. In effect, these funds are expanding geographically, moving their organizations into the markets they find appealing, rather than waiting for intermediaries to come to them, reflecting a broader trend towards the professionalization of pension and sovereign fund investment organizations. In this paper, we document and assess this trend, while also offering a set of principles and policies that could guide investors on their path to greater geographic distribution of organizational capabilities. In forming our arguments, we rely on the findings from twelve case studies of pension and sovereign funds.

Assessing Hong Kong as an International Financial Centre

By the end of the 20th century, Hong Kong had emerged as one of the world's major international financial centres. Today, while finance remains central Hong Kong's future, it is facing unprecedented challenges, in China, in the region and globally. In the context of China, the continuing process of economic reform and financial development raises many opportunities but at the same time brings into question Hong Kong's traditional role as the primary intermediary between China and the global financial system. At the same time, the global and European financial crises have raised fundamental questions about finance, exchange rate systems, the global position of China, and the future role of the renminbi, including Hong Kong's role therein. Reflecting the centrality of finance Hong Kong, Article 109 of the Hong Kong Basic Law, ascribes the Hong Kong Government an obligation to provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial However, Hong Kong has yet take a comprehensive approach this obligation or consider its strategic and practical implications. While the creation of the Hong Kong Financial Services Development Council (FSDC) is a very important step, more remains be done. There is no question that Hong Kong has developed impressively and is performing very well as an international financial centre. This is clear and well established and is thus not the central theme of this report. Rather, this report seeks consider areas where Hong Kong could do better. Thus, the central theme of this report focuses on the need for a more strategic approach Hong Kong’s future as a financial centre, based on an analysis of academic and policy research and current expectations of regulatory and commercial practice. This report is the first of a major research project on Enhancing Hong Kong’s Future as a Leading International Financial Centre, funded by the Hong Kong Research Grants Council Theme-based Research Scheme. Throughout this report (and in the two others which will follow in 2015 and 2017) our analysis seeks answer one specific question: What policies and legislative/regulatory changes will maximise the long-run, risk-adjusted value of financial activities Hong Kong, given that other international financial centre policymakers react strategically such policies? In addressing this issue, the report provides 21 recommendations focusing on five major areas: The first grouping addresses methods help improve the way the public contributes financial sector policymaking. The second group proposes ways that the directing minds of Hong Kong’s financial and commercial organisations can participate more actively in ensuring Hong Kong’s regulators adopt policies which actually improve Hong Kong’s competitiveness among international financial centres (rather than just copy international best practice). The third grouping looks at ways broaden cooperation with China. The fourth grouping looks at ways diversify Hong Kong’s financial sector access opportunities beyond those presented by the Mainland. The final grouping of recommendations discusses ways of improving the way Hong Kong’s regulators work help maximise the risk-adjusted returns the financial sector as a whole.

The competitive position of Shanghai in the Asia-Pacific region: a comparative study

This paper looked at 12 International Financial Centers (IFCs) in the Asia-Pacific region by employing hierarchical cluster analysis and principal component analysis and applying them to 10 financial variables. This study has demonstrated that as a result of increased foreign financial institutions’ participation and the expansion of markets’ size, Shanghai is fast closing up the gap with other major IFCs. Shanghai might pose a challenge not only to Hong Kong but also to Tokyo in the next few years if China’s Government further liberalizes its financial markets to foreigners and augments the range of financial instruments.

China’s Financial Reforms: Why Dysfunctional Banking Survives

Summary There is a growing academic consensus critical of the progress of China’s banking reforms. This pessimism coincides with official alarm in 2011 about the considerable but unexpected setback to the reform process that has followed the global financial crisis. This paper investigates the mismatch between the ambitious goals set by repeated modernisation programmes for the financial sector since the 1970s and the limited progress in achieving a modern, market-driven, banking sector. The review identifies persistent political intervention in credit management as the fundamental threat to sound banking and investigates why the state has tolerated repeated surges in non-performing loans rather than conceding the autonomy that sound commercial banking requires. The paper shows that the reform process has been driven very much by the immediate banking requirements of high-speed growth through modernisation and globalisation of the manufacturing sector. This process involved first resurrecting conventional banking facilities abolished under the Soviet-style ‘command economy’ and then financing the nation’s investment drive undertaken by largely autonomous local governments and the burgeoning private sector. International financial services and foreign banking practices were not a priority, unlike former Soviet Bloc and many Third World nations, since China could rely on the major international financial centre provided by Hong Kong. Subsequently, the state felt unable to free banking from central control and political interference because it was the last government ‘paymaster’ to survive the retreat from central planning. Credit creation and allocation via the banking system has been the easiest source of funding to finance rural transformation, to counter global crises, to fund major social development projects and to enforce environmental and similar goals on business. Central bankers and financial regulators have lobbied unsuccessfully for competition to prevail. The political convenience of the current arrangements makes state involvement hard to surrender.

Placing the run on northern rock

The collapse of Northern Rock in 2007 was the first major run on a UK retail bank since 1866. The Northern Rock case is exemplary on two fronts. First, described at the time of its collapse as an example of an aggressive business model employed by naïve management, it is now clear that Northern Rock marked the beginning of and provides insights into the credit crunch and wider global banking crisis. Second, Northern Rock provides a distinct context—geographically and institutionally—to explore the banking crisis. The article utilizes management interviews, secondary literatures and an investigation of the wider impacts of the restructuring of Northern Rock to produce a reading from the perspective of a peripheral financial region. It contributes to attempts to understand financial geographies that range beyond the major international financial centres that often dominate debates in Economic Geography.

The Trajectory of Regulatory Reform in the UK in the Wake of the Financial Crisis

There has been much talk about regulatory reform around the world in the wake of the financial crisis but relatively little action. As a major international financial centre, the UK is very much at the heart of the debate and has a particular interest in the ultimate outcome. The financial crisis has exposed the weaknesses of ‘light touch’ regulation and ‘principles-based’ regulation, which characterised the UK system in the pre-crisis phase. Changes to the institutional structure of regulation recently announced by the new coalition government, combined with changes to regulatory style, are likely to have far-reaching consequences for the practice and intensity of regulation in the UK. This article reviews and assesses recent and proposed regulatory changes and considers the relationship between corporate governance and regulation. It evaluates the impact on the UK system of initiatives undertaken at international and EC levels as well as various interests and incentives within the UK that are likely to be influential in shaping the regulatory regime in years to come.

The Global Crisis: Why Laisser-Faire Hong Kong Prefers Regulation

This paper explains why, despite the anti-Keynesian convictions of officials and academics, Hong Kong abandoned its initial commitment to the concepts of virtuous markets and moral hazard and resisted importing the prevailing Anglo-American regulatory i¥culturei¦. It reviews foreign attacks on the governmenti¦s intervention to protect financial markets during global crises and shows that these critics have misunderstood the limits of Hong Kongi¦s attachment to laisser faire. The analysis traces the process by which increasingly strict regulation has been introduced without hindering the expansion of Hong Kongi¦s role as a major international financial centre.

The significance and performance of property securities markets in the Asian IFCs

This paper assesses the significance, risk‐adjusted performance and portfolio diversification benefits of the listed property securities markets in the Asian international financial centres (IFCs) of Tokyo, Singapore and Hong Kong over January 1998 – March 2008, contrasting this performance to six major non‐IFC markets in Asia. Significant risk‐adjusted returns are evident for these Asian IFCs, with this having been enhanced in recent years. Portfolio diversification benefits are also evident for these Asian IFCs; however, superior portfolio diversification benefits are provided by the Asian non‐IFC markets in a pan‐Asia property portfolio context for global investors. These results highlight the need for global investors in the Asian markets to include both the major IFC markets and the non‐IFC markets to achieve effective portfolio diversification benefits in their pan‐Asia property portfolios.

International financial remoteness and macroeconomic volatility

This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are farther from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for political institutions, trade, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.

International Financial Remoteness and Macroeconomic Volatility

This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for domestic financial depth, political institutions, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.

Investment analysts’ usage and perceived usefulness of corporate annual reports

This paper reports a study of the perceptions and beliefs of external users (investment analysts) of corporate annual reports in one of major international financial centres – Hong Kong. It was found that analyst users (1) view annual reports as having high information value particularly in terms of relevancy, (2) have a relatively high usage of annual reports and read the income statement and balance sheet most often, (3) consider the most important voluntary disclosure items to be discussions of factors affecting future financial results, future prospects of the company, main product market share, acquisition and disposal activities, and China business review, and (4) feel annual reports are somewhat useful, but the amount of information disclosed remains inadequate. Only a small percentage of users felt that the current disclosure requirements are either effective or very effective in serving investors’ needs and that much improvement is still needed. The implications of these findings for management, investors, regulatory bodies and researchers are discussed.

Preparers' perceptions of corporate reporting and disclosures

This paper reports a study of the perceptions of preparers of corporate annual reports (mainly chief finance officers (CFOs)) on the usefulness and concerns of corporate disclosures in Asia's major international financial centre — Hong Kong. From a survey of 98 preparers, it was found that preparers are more inclined to satisfy the information needs of external institutional finance suppliers than those of individual investors and financial analysts or stockbrokers. CFOs and CEOs have more influence on corporate disclosure policies and decisions than board chairmen and company directors. The stock exchange, the Company Ordinance and the local accounting standards setter are more influential external bodies than external auditors and the Securities and Futures Commission. Although only a small percentage of preparers felt that the current disclosures were either effective or very effective in serving investors' needs, only a small number of them agreed to have more financial reporting and disclosure regulations. To close the communications gap and improve market efficiency, they suggested instead an improvement in investor relationships, developing more industry-specific disclosure guidelines and more voluntary disclosures. Implications of these findings are discussed.