What you want. Baby, I got it.
-- Aretha Franklin
I tire of the constant press speculation about the next European Financial Capital; claims that Brexit has created a window of opportunity for Dublin/Frankfort/Amsterdam because business passports are going away, or whatever. An attention-getting recent discovery by the press that LIBOR was manipulated by the Bank of England during the Crisis throws light on the vacuous reality of EU's competitive threat to the London financial markets.
London will lose almost no financial business to the EU. The banks will make some cosmetic staffing changes, lest the public identify the fundamental reality of London's attraction. London is the welcoming safe harbor for big bank oligopoly pricing, symbolized by LIBOR. There are plenty of other reasons that the big banks - now almost entirely American banks, when measured by trading activities - will avoid any significant regulation by the authorities of the European Union, but the "hands off" policy on market regulation by the Bank of England is London's ace of spades.
Why London finance exists.
Make no mistake. Without the occasional heavy-handed blundering of US bank regulators - most important historically, the failure to eliminate Reg Q ceilings on deposit rates in the early 1970's, the signpost of Congressional inaction that created the Eurodollar market - there would be no significant London financial presence. London success is the result of its willingness to support financial institution interests of dubious ethical provenance, coupled with its respect for property rights as codified in Anglo-Saxon law.
This London two-step is an essential counterbalance to the US electorate's occasional temper tantrum - witnessed in the last election - and the resulting threat to the viability of financial institutions.
The recent news: we are "discovering" that the Bank of England (BofE) pressured the big banks to reduce LIBOR from its high levels during the Crisis, high levels that perhaps appropriately reflected investor fears of a banking system in crisis. BofE wanted LIBOR moved to lower levels to portray a false, but desired in both London and Washington, impression of depositor views of safety.
Yet the London banking community would have you believe that LIBOR is the market's offer rate on a wholesale dollar deposit in London.
What a joke. As though BofE didn't create LIBOR, with its abuses, in the first place. LIBOR was designed out of desperation in the early 1980's when CME Group's (NASDAQ:CME) Eurodollar futures contract threatened to measure actual daily market values of wholesale dollar deposit rates in The City. London would have none of that.
In other words, the Bank of England and its big bank clients were confronted with the possibility that depositors would be routinely aware of the real price of wholesale money to the big banks - much lower than LIBOR. The effects of borrower awareness of the true cost of money to the banks would have been - and still would be - seismic. An estimated $80 trillion in assets globally would be less costly to borrowers - an enormous shift of wealth from the banks to LIBOR-based borrowers.
LIBOR is an edifice erected overnight by quickly formalizing the old method - deciding LIBOR over sherry at a gentlemen's club - by forming an official-sounding group, the British Bankers Association, to decide what LIBOR rate was best for the banking community. The method for "fixing" LIBOR was carefully patterned after the daily London Gold Fixing, a more-explicitly-self-serving price setting practice that has been quietly enriching the London gold dealers for over a century.
The central reason for the attraction for London to American banks is being exposed once again. Surprisingly, it's not the London weather. It is the hospitality of the Bank of England for the big banks' OTC market oligopoly. And a certain flair for coexisting with the American regulators BofE seemingly thwarts.
The sun will never set on the British financial empire.
London has two properties that rule out competition from other financial capitals in its role as toady to the big banks:
- The electorate of Great Britain has made its deal with the devil. They tolerate greedy bank behavior if it is "ring-fenced." Ring fencing is the British strategy for walling off the effect of big bank risk-taking - preventing the disastrous results of the risks taken by greedy big bankers from affecting the portion of domestic financial institutions that serve the public. Why? The tax bill to financial institutions are a substantial share of the total British tax revenues. In other words, Britain is small enough to ensure that the miniscule tax rates of banks produce revenues of sufficient size to keep the public at bay.
- London has always favored banks over other commercial interests - part of its colonial heritage. Thus, banks in London are less vulnerable to competition from the financial institutions that are competitive alternatives to the banks - institutions in the process of not-so-gradually seizing the financial reins in the US from the dowdy American big banks.
There is something fundamentally flawed about New York as a financial capital. American culture. At the end of the day, Wall Street behaves in a way that makes it "other" from the point of view of voters. And this "otherness" is, by design, greed-driven. This is fact, not criticism. Greed, or euphemistically, the profit motive, is essential to the function of capitalism. But it will, from time to time, result in a threat of total annihilation from the less financially focused electorate. Hence the need for the less numerous, more easily placated, electorate of Great Britain.
As an alternative to London, the capitals of the EU are non-starters.
The European Union was and is anathema to the big banks. Recent popular right-wing movements notwithstanding, the banks of the EU are basically government owned and operated for a reason. The EU does not accept the vital, yet somewhat unattractive, essential role of capitalism - the destruction of anti-competitive arrangements that interfere with commerce. True market-based capitalism cannot function in the EU. (Except for what might be called "national capitalism.")
But the EU can certainly house holier-than-thou regulators. The EU specializes in regulations that the public ignores. Regulators appointed by an appointed central legislature, in turn appointed by locally elected officials, are masters of passing highly restrictive regulations that nobody obeys.
The simultaneous realities of EU banking and the presence of various sanctimonious institutions the globe supports, for example: The Bank for International Settlements (BIS), The International Monetary Fund (IMF); create a cautionary tale for those financial institutions that continue to seek gain from competitive excellence. The EU - and its coterie of global, hence unaccountable to any electorate, institutions - has no fear of passing restrictive regulatory policies to be implemented by other people - individual actual governments.
The individual actual national governments of the globe, mostly accustomed to selectively obeying their own laws, immediately adopt such international regulations into law and disobey those along with the other fictive laws. But countries where the legal canon has weight are strangely recalcitrant in adopting international regulatory standards.
Great Britain never got used to the Continental habit of selective law enforcement, which made EU regulations automatically tougher there. There are many "silent" differences between Britain and the rest of Europe that get little attention in the Brexit dialog. This difference in the public treatment of law is at the top of my list.
One may oppose London regulatory practice. But at least these regulatory practices are to be found in the British legal code. Unless another country accepts that Anglo-Saxon legal discipline, there will never be a serious challenger to New York other than London.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.