Rank mysteries

By Howard Davies

Former Chairman of Britain's Financial Services Authority, Deputy Governor of the Bank of England, and Director of the London School of Economics, is a professor at Sciences Po in Paris.

Gibraltar received exciting news last month. The latest Global Financial Centres Index (GFCI), published by the consultancy Z/Yen in London, revealed that the Rock had risen further and faster up the ranks than any other center - 17 places, from 70th to 53rd position, since the previous report in September 2013.

I can imagine the celebrations in Gibraltar Town, where, now that the British naval base has closed and Spain is being difficult at the border, financial services are crucial for employment. And I can also imagine that many in Hamilton, Bermuda, which plummeted almost as far as Gibraltar climbed - 16 places, to 56th - must be crying into their rum punch.

Of course, it is also possible that Gibraltar and Bermuda have chosen to ignore the results, or dispute their significance. Either way, there is no doubting the global obsession with league tables nowadays. One can find a ranking for almost every form of human activity.

Commercial banks are ranked by assets. Investment banks are ranked on a variety of metrics, as are universities - from academic results to their prowess in environmental management, or their appeal to gay students. In the United Kingdom, you can find a table showing where it is best to live if you wish to win Britain's National Lottery. (Your chances are almost twice as good in the northeast as in Northern Ireland.)

When one looks closely, most of these tables are, as Henry Kissinger famously put it, "content-free." For one brief shining moment, the Royal Bank of Scotland was global top dog in rankings of commercial banks, and we know how that story ended. Is this true of the GFCI, or does it contain valuable insights into how the global financial system is evolving?

The press headlines accompanying the release of the latest GFCI focused on the change at the top of the league: New York leapfrogged ahead of London, while Hong Kong and Singapore held on in third and fourth place, respectively. Is this a significant switch?

Much speculation has centered on the recent damage to London's reputation stemming from the scandal surrounding banks' manipulation of the Libor interest rate. Even if some of the machinations were carried out in other cities, there is no escaping the fact that Libor is the London Interbank Offered Rate. Moreover, London is the biggest center for foreign-exchange trading, the new focus of regulatory attention. And, though Bruno Iksil was a Frenchman working for the American bank JPMorgan Chase, he became known universally as the "London Whale."

But GFCI's detailed results do not bear out that explanation. London's reputational factors "are firmly above average and have not seen much change over the past five editions." Indeed, it seems that London's small decline is attributable to negative scores on general factors such as the "business environment" and "infrastructure."

Overcrowded Underground trains and Heathrow's congestion are having an impact, though it is hard to understand why New York wins on these measures. Riding the Subway often brings unpleasant surprises, while JFK Airport is hardly a favorite among travelers (and there remains no fast rail link to it).

And yet these subtle switches at the top of the table are not the real story. From a ten-year perspective, the big gainers have been Hong Kong and Singapore.

It was once fashionable to argue that when China opened up to the world, Hong Kong and Singapore would suffer. Once the Chinese got their act together, these cities' role in intermediating the region's finances would be marginalized by Shanghai, Shenzhen, and other new centers. That still may happen one day, but it has not happened yet.

Hong Kong and Singapore have played their cards astutely. The combination of an Asian market with strong Chinese connections and a system of English law and property rights continues to provide a powerful competitive advantage. That is especially true in fund management. Chinese companies may increasingly raise capital in Shanghai, but wealthy Chinese with money to invest like to hold it in financial centers that are perceived as safe and non-political.

In Europe, we see a different pattern. Over 15 consecutive surveys, London's ranking and ratings have remained broadly constant, while Zurich, Geneva, Frankfurt, and Luxembourg have gradually narrowed the gap with it - though that gap remains wide.

There is little doubt that Frankfurt has won the contest with Paris to be the eurozone's most important financial center. The Germans were smart to insist on putting the European Central Bank there. Given the ECB's new function as the eurozone's banking supervisor, Frankfurt can consolidate its victory. Every European Union bank will need to bend the knee to its supervisor on the Main River, even if she does happen to be a Frenchwoman, Danièle Nouy.

In the United States, Boston, San Francisco, and Washington, DC, continue to consolidate their positions as important centers for asset management and, in the last case, for regulation. The 2010 Dodd-Frank financial-reform legislation has given the Federal Reserve Board a much larger regulatory role than it had before the crisis. But, unless New York's populist new mayor, Bill de Blasio, tries to run the banks out of town, Western sheriff-style, these cities do not seem likely to steal Wall Street's crown anytime soon.

All of the best award shows include a surprise. This year's wild card, billed as the financial center most "likely to become more significant" in the near future, is Casablanca. I have no idea why Casablanca is an up-and-coming center, and the GFCI's compilers do not explain. Sometimes, in rankings as in life, a kiss is just a kiss.

Copyright: Project Syndicate

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