Study Note

Global Financial Centres

Global Financial Centres

Introduction

Global financial centres are cities or regions that are the primary locations for financial activity in
the world. They play a critical
role in global economic growth
and development, as they
serve as hubs for capital,
investment, and innovation.
These centers are crucial to the
global economy as they attract
capital, facilitate investment,
and enable businesses and
individuals to access capital
markets. The rise of global
financial centers has been
driven by factors such as
globalization, technological
advances, and the
deregulation of financial markets.

There are several leading global financial centers around the world. To name a few, New York,
London, Singapore, Hong Kong, and Tokyo are some of the leading global financial centres in
the world.

While India had two major

financial centres previously,
namely, Mumbai and New
Delhi, GIFT-City in Gujarat is
the first and the only
international financial services
centre in India, as of now.

The difference between a

simple financial centre and an
international financial centre
(IFC) is that IFCs cater to customers outside their own jurisdiction and deal with the flow of finance
and financial products/services across borders.

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Global Financial Centres

Evolution of Global financial centres (GFCs)

The evolution of GFCs can be traced back to the rise of international trade and finance in the late
Middle Ages, when cities such as Bruges, Genoa, and Venice emerged as key commercial hubs.
However, the modern era of GFCs began in the 19th century, with the growth of industrialization
and globalization.

During this time, London emerged as the dominant financial center, due to its position as the
center of the British Empire and the largest economy in the world. London was also home to the
Bank of England, the world's first central bank, which played a crucial role in stabilizing the
financial system and promoting economic growth.

In the early 20th century, New York City emerged as a rival to London, fueled by the growth of
the American economy and the establishment of the Federal Reserve System, which provided a
similar stabilizing influence as the Bank of England. New York City became the center of the
world's largest capital markets, with the New York Stock Exchange and the nascent bond market
attracting investors from around the world.

In the second half of the 20th century, other GFCs emerged, reflecting the growth of the global
economy and the increasing importance of financial services. These included Tokyo, which
became a major financial center in the 1970s and 1980s, driven by the growth of the Japanese
economy and the establishment of a modern financial infrastructure. In the 1990s, Hong Kong
and Singapore emerged as key financial centers in Asia, due to their strategic locations, well-
developed financial systems, and favorable regulatory environments.

More recently, emerging market economies such as Shanghai and Dubai have sought to establish
themselves as GFCs, reflecting the growing importance of these economies in the global financial
system. Shanghai, for example, has sought to become a leading center for international finance,
through the establishment of the Shanghai Stock Exchange and the Shanghai Free Trade Zone,
which offers preferential tax treatment and streamlined regulatory processes for foreign investors.

Overall, the evolution of GFCs reflects the ongoing transformation of the global economy and the
growing importance of financial services in supporting economic growth and development. While
London and New York City remain dominant financial centers, other cities are seeking to
challenge their position, reflecting the increasing diversity and complexity of the global financial
system.

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Global Financial Centres

Types of International Financial Centres

International Financial centers can be categorized as follows, based on the size and scope of
financial services offered and different regions and markets they serve. While generally all of
these are some sort of global financial centres, but differ in their scope to some extent:

• Traditional or Global financial centers: Traditional financial centers are the most well-
known and established centers, such as New York and London. They are the largest and
most influential financial centers, with a long history of financial activities and a highly
developed infrastructure. These centers are home to the world's largest banks, investment
firms, and stock exchanges. These are centres that genuinely serve clients from all over
the world in the provision of the widest range of financial services, including asset
management, investment banking, insurance, and trading. As such, they are mostly
referred to as the Global Financial Centres (GFCs) in true sense.
• Regional financial centers: Regional financial centers serve specific regional economies
rather than just national economies. Examples include Singapore and Hong Kong for Asia,
and Dubai for the Middle East. They are smaller than traditional centers but still play a
significant role in the global financial system. They offer specialized financial services
tailored to their respective regions, such as Islamic finance in the Middle East and wealth
management in Singapore.
• Non-global and non-regional, ordinary international FCs - These are centres like
Paris, Frankfurt, Tokyo and Sydney that provide a wide range of international financial
services but cater mainly to the needs of their national economies rather than their regions
or the world. Mumbai, in India, is also one such financial centre. They may be understood
as national financial centres providing facilitating international financial services as
required.
• Offshore financial centers: Offshore financial centers (OFCs) are jurisdictions that
provide tax and regulatory advantages to businesses and individuals. These are centres
that are primarily tax havens for wealth management and global tax management rather
than providing the fully array of international financial services. Examples include the
Cayman Islands, Bermuda, and the British Virgin Islands. These centers offer low taxes,
minimal regulation, and strict secrecy laws that make them attractive to those seeking to
reduce their tax burden or conceal their financial activities. However, OFCs have faced
criticism for facilitating tax evasion and money laundering.
• Niche financial centers: Niche financial centers focus on specific financial activities, such
as commodity trading, foreign exchange, or insurance. Examples include Zurich for
insurance and Geneva for wealth management. These centers offer specialized services
and expertise in their respective areas and often have a competitive advantage over larger
centers that offer a more diverse range of services.

Other financial centers are emerging to rapidly grow and develop their financial services.
Examples include Shanghai and GIFT-City. These centers are driven by strong economic growth
and the increasing demand for financial services in their respective regions.

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Global Financial Centres

International financial services (IFS) provided by Global Financial Centres

A global financial centre would provide all of the following international financial products and
services. Other types of international financial centres provide some combination of these:

• Fund Raising: fund raising services and products for individuals, corporations and
governments (sovereign and sub-sovereign). This includes funds raised in form of debt
and quasi-debt across maturity/currency, equity and quasi-equity for private, public and
public-private corporations as well as risk-management appendices attached to primary
fund-raising transactions to ensure that the risk exposure of the primary borrower or
fundraising entity (to currency, interest rate, credit, market, operational and political risks)
does not exceed tolerable limits.
• Asset Management and Global Portfolio Diversification: undertaken by a variety of
national, regional and global asset managers including, inter alia pension funds, insurance
companies, investment and mutual funds of various types characterized by nature of
instrument (i.e. debt, equity or convertibles), geography, or sector of activity.
• Personal Wealth Management (PWM): Management of personal assets for high-net
worth individuals.. PWM takes place in established global financial centres, but is more
skewed towards specialised or niche financial centres like Switzerland, Luxembourg, and
Monaco EU and Africa; Caribbean offshore centres for the US and Latin America; Bahrain
and Dubai for the Middle East; Singapore, Hong Kong and some Pacific Island offshore
centres for East/North Asia.
• Global Transfer Pricing: Transfer pricing relates to the price, non-arm’s length
companies located in different jurisdictions, charge each other for goods and services. In
a global economy dominated by transnational corporations, global transfer pricing is
becoming increasingly important for multinationals. Global transfer pricing helps
corporations develop transfer pricing policies that maximise the potential for increasing
the company’s after-tax income, while minimising the likelihood that it will be subject to tax
adjustments and penalties.
• Global Tax Management and Crossborder Tax Liability Optimisation: which provides
a business opportunity for financial intermediaries as well as accountants and law firms
until national tax regimes begin to converge toward a global low tax norm.
• Global/Regional Corporate Treasury Management Operations: involves fund raising,
liquidity investment and management, asset-liability and duration matching, and risk-
management through insurance and traded derivative products for currency, interest-rate,
credit and political risk exposure.
• Global/Regional Risk Management Operations and Insurance/Re-insurance: which
involves highly developed exchange traded and tailored derivatives (futures, options,
swaps, swaptions, caps and collars) as well as world class derivatives exchanges that
trade a variety of global contracts.
• Global/Regional Exchange Trading of Financial Securities, Commodities and
Derivatives Contracts in Financial Instruments/Indices and in Commodities: There
is an increasing tendency toward multiple listings of financial securities (equities and debt),
and of derivative and commodity contracts, on different exchanges with emerging investor

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Global Financial Centres

demand for 24 x 7 x 365 trading of all listed securities across all exchanges. Demand is
highest for the securities of index-corporations in each major capital market. It will
gradually cascade downwards to cover global trading of all listed securities in all markets
– developed and emerging.
• Financial Engineering and Architecture for Large Complex Projects: This primarily
involves energy and infrastructure projects requiring funds from a variety of global sources
(public and private) with attached risk-management.
• Global/Regional Mergers and Acquisitions Activity: This will become increasingly
important in India and for which a considerable amount of back-office BPO/KPO and due
diligence research work is already being outsourced to India.
• Financing for Global/Regional Public Private Partnerships: This relatively new activity
has emerged due to its relevance for the financing and rapid development of infrastructure
without recourse to the treasury.

Functions and Objectives of Global Financial Centres (GFCs)

The primary functions and objectives served by the GFCs include:

• Facilitating capital flows: GFCs are essential in facilitating capital flows between
countries and regions. They provide a platform for investors and borrowers to access
global capital markets and facilitate the transfer of funds across borders.
• Attracting foreign investment: GFCs also play a crucial role in attracting foreign
investment, both direct investment and portfolio investment. This investment can help to
drive economic growth and development, create jobs, and support innovation and
entrepreneurship. GFCs often offer a range of financial incentives and infrastructure to
attract foreign investment, such as tax breaks, business-friendly regulations, and high-
quality physical and digital infrastructure.
• Supporting international trade - GFCs play a crucial role in supporting international
trade, providing a platform for the exchange of goods and services and facilitating cross-
border financial transactions. GFCs often offer specialized financial services tailored to
the needs of importers, exporters, and other international trade participants, such as trade
finance, foreign exchange, and export credit insurance.
• Providing financial services: GFCs offer a wide range of financial services, including
investment banking, asset management, insurance, and trading. These services are
essential for businesses, governments, and individuals seeking to raise capital, manage
risk, and invest in the global economy. GFCs also provide specialized services tailored to
specific regions or markets, such as Islamic finance in the Middle East or wealth
management in Singapore.
• Setting financial standards: GFCs often set financial standards and regulations that
influence the global financial system. They are home to some of the world's largest
financial institutions, regulators, and standard-setting bodies, such as the International
Monetary Fund (IMF) and the Bank for International Settlements (BIS). GFCs also play a
significant role in shaping global financial policy and regulation.

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Global Financial Centres

• Supporting innovation: GFCs are hubs for innovation in finance, technology, and
business. They attract top talent, encourage entrepreneurship, and foster collaboration
among industry participants. GFCs also support the development of new financial
products and services, such as blockchain technology, digital currencies, and peer-to-peer
lending.
• Driving economic growth: GFCs are significant contributors to global economic growth,
creating jobs, generating tax revenue, and supporting investment and trade. They often
serve as the primary engines of economic growth for their respective regions, attracting
foreign investment and driving innovation and development.

The objectives of global financial centers are diverse and often depend on the specific center and
its strategic priorities. However, common objectives include attracting foreign investment,
supporting international trade, promoting financial innovation, setting global standards, and
driving economic growth. These objectives are often closely linked and reinforce each other,
contributing to the overall development and competitiveness of the global financial system.

Global Financial Centres (GFCs) and Capital Account convertibility

Capital account convertibility refers to the freedom to convert a country's domestic currency into
foreign currency and vice versa, without any restrictions or limitations. It allows individuals and
institutions to move their money across
borders, invest in foreign assets, and
take profits or dividends from those
investments back to their home country.

Capital account convertibility is one of the

key features of a liberalized financial
system, which promotes financial
openness and integration with the global
economy. It is often considered an
important indicator of a country's
economic development and financial
stability.

There are two types of capital account convertibility:

a. Partial capital account convertibility: In this type of capital account convertibility, certain
categories of transactions are allowed, while others are restricted. For example, a country
may allow foreign direct investment and portfolio investment but restrict the repatriation of
capital or the issuance of foreign currency-denominated debt.
b. Full capital account convertibility: In this type of capital account convertibility, all
categories of transactions are allowed without any restrictions. This means that individuals
and institutions are free to move their money in and out of the country without any
limitations.

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Global Financial Centres

GFCs can play a significant role in facilitating capital account convertibility, i.e. the ability
of individuals and institutions to freely move capital in and out of a country's financial system.
Global financial centers play an important role in facilitating capital account convertibility, by
providing a platform for cross-border financial transactions, developing financial infrastructure,
encouraging foreign investment, promoting financial liberalization, and influencing international
financial policy. GFCs can contribute to capital account convertibility in the following ways:

• Providing a platform for cross-border financial transactions: GFCs often offer a wide
range of financial services, including foreign exchange, trade finance, and international
payment systems, that facilitate cross-border financial transactions. These services can
help to make it easier and more efficient for individuals and institutions to move capital
across borders, reducing transaction costs and increasing the speed and volume of cross-
border flows.
• Developing financial infrastructure: GFCs often invest in developing high-quality
financial infrastructure, including modern banking systems, reliable payment and
settlement systems, and robust regulatory frameworks. This infrastructure can help to
promote confidence in the financial system and reduce the risk of capital flight or other
destabilizing events.
• Encouraging foreign investment: GFCs often offer financial incentives and other
benefits to attract foreign investment, such as tax breaks, streamlined regulatory
processes, and access to a deep and liquid market. This can help to increase the volume
and diversity of capital flows into the country, supporting economic growth and
development.
• Promoting financial liberalization: GFCs often prioritize financial liberalization,
encouraging the removal of restrictions on capital flows and promoting greater openness
and integration with the global financial system. This can help to increase the volume and
diversity of capital flows, reduce transaction costs, and promote economic growth and
development.
• Influencing international financial policy: GFCs often play a significant role in shaping
international financial policy, influencing the development of global financial standards and
regulations. By advocating for policies that support capital account convertibility and the
free movement of capital, GFCs can help to create a more supportive environment for
cross-border capital flows.

Capital account convertibility can help to support economic growth and development by
increasing the volume and diversity of capital flows and promoting greater financial integration
with the global economy.

Leading Global Financial Centres (GFCs)

There are several factors that contribute to the success of a global financial center. A successful
global financial center is characterized by their ability to attract capital, provide a range of financial
services, and support a highly skilled labor force and infrastructure. Furthermore, political stability

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Global Financial Centres

and a favorable business environment is critical to the success of a global financial centre. A
leading GFCs would typically have the following features:

• Political stability and a favorable business environment: This includes factors such
as low taxes, flexible labor laws, and a strong legal system that protects property rights
and enforces contracts. These factors create an environment that is conducive to doing
business and attracts investment.
• Availability of skilled labor: Global financial centers require highly skilled professionals
such as bankers, traders, and investment managers. The availability of a highly skilled
labor force helps to attract financial institutions and enables them to provide high-quality
financial services.
• Infrastructure: Global financial centers require advanced telecommunications,
transportation, and technology infrastructure to facilitate the movement of funds and data
across borders. Access to international airports, high-speed internet, and modern office
buildings are essential for attracting global financial institutions.
• Strong regulatory environment: they have a strong legal and regulatory environment
that protects investors and ensures the stability of the financial system.

Some of the leading GFCs are:

• New York: New York is considered the leading global financial center. It is home to the
New York Stock Exchange (NYSE) and NASDAQ, the two largest stock exchanges in the
world. It is also home to many of the world's largest banks and investment firms. New
York's dominance in the financial industry is due to its favorable business environment,
skilled labor force, and world-class infrastructure. It is ranked as the No. 1 GFC in the
world as per the Global Financial Centres Index 32 released in September 2022.

• London: London is another leading global financial center. It is home to the London Stock
Exchange and the largest foreign exchange market in the world. London's financial
industry is supported by its strong legal system, flexible labor laws, and a highly skilled
labor force. The city also benefits from its strategic location between the Americas and
Asia, which makes it an attractive location for global financial institutions. It is ranked
second position in the world as per the Global Financial Centres Index 32 released in
September 2022

• Singapore: Singapore has emerged as a leading global financial centre and is ranked at
the third position in the world as per the Global Financial Centres Index 32 released in
September 2022. Singapore developed as a GFC and has the advantage of being at the
centre of the large and flourishing ASEAN regional economy. When other Asian countries
had capital controls and policies inimical to the growth of their financial systems,
Singapore positioned itself as a venue with no capital controls and sophisticated financial
regulation. It became a genuine regional GFC for ASEAN as well as a GFC linking ASEAN
to global markets. Its favorable business environment, skilled labor force, and world-class
infrastructure has helped it to emerge as a leading GFC.

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Global Financial Centres

• Hong Kong: Hong Kong is another leading financial center in Asia. It is a hub for banking,
asset management, and insurance, and is home to the Hong Kong Stock Exchange. Hong
Kong's financial industry is supported by its strategic location in Asia, its favorable
business environment, and its highly skilled labor force. It is ranked at the 4th position in
the GFC Index 32.

Note - You may refer to the GFC Index video and PDF in the course for more details on the index.

Challenges of Global Financial Centres (GFCs)

While GFCs play a crucial role in the global economy, they also face certain challenges:

• Concentration of financial activity: GFCs are highly concentrated centers of financial

activity, with a small number of large institutions dominating the market. This concentration
can lead to systemic risk, where the failure of a few large institutions can have a significant
impact on the entire financial system. It can also create an uneven distribution of wealth
and power, with a few wealthy individuals and institutions controlling a disproportionate
amount of resources.
• Regulatory challenges: GFCs often face challenges in regulating the complex and
rapidly evolving financial activities taking place within their borders. Regulatory arbitrage,
where businesses take advantage of differing regulations across jurisdictions, can create
a race to the bottom in terms of regulatory standards. GFCs also face challenges in
coordinating and enforcing international regulations, particularly in the context of cross-
border financial transactions.
• Vulnerability to external shocks: GFCs are vulnerable to external shocks, such as
economic downturns, geopolitical instability, or natural disasters. These shocks can have
a significant impact on financial institutions and markets, leading to widespread financial
instability and economic recession. GFCs also face cybersecurity risks, with the potential
for cyber attacks to disrupt financial systems and steal sensitive information.
• Competition from emerging centers: GFCs face increasing competition from emerging
financial centers, particularly in Asia and the Middle East. These centers are rapidly
developing their financial industries and attracting investment and talent. GFCs may
struggle to maintain their competitive edge in the face of this competition, particularly as
emerging centers become more established and gain greater market share.
• Social and environmental impacts: The activities of GFCs can have significant social
and environmental impacts, particularly in terms of income inequality, environmental
degradation, and social exclusion. The concentration of wealth and power in GFCs can
exacerbate inequality both within and across countries. The activities of financial
institutions can also contribute to environmental degradation and social exclusion,
particularly in the context of extractive industries, speculative investments, and real estate
development.

Though GFCs face several challenges in today's rapidly changing world, their contribution to the
development of the global financial system is far more. They promote transparency, efficiency,

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Global Financial Centres

and stability of the global financial system. They provide a platform for financial innovation, which
has led to the development of new financial products and services that meet the evolving needs
of businesses and consumers. They also play a critical role in the regulation of the global financial
system, ensuring that financial institutions operate in a safe and sound manner, and that investors
are protected.

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