• July 4th, 2022
• By Midsilver Investment Limited

Financial hubs that mainly serve international clients play a significant role in global financial transactions. These hubs, termed cross-border financial centres, are usually situated in smaller economies, unlike global financial hubs which are found in larger economies. While the advantages of scale and breadth benefit the global centres, factors like geographical distance can hinder the centralization of financial activities. Regulations and tax policies have also played a role in distinguishing and boosting the prominence of cross-border centres. However, they also bring challenges in maintaining regulatory uniformity globally and in deciphering capital movement patterns.

Cross-border financial centres have firmly established themselves in the global finance landscape. Before the 1970s, cities like London and New York, which were also hubs for local financial activities, dominated international financial intermediation. But post-1970s, the importance of centres mainly serving international clients grew significantly. The global assets and liabilities of small economies hosting these centres expanded from about 15% in the late 1980s to 30% by the late 2010s, even though their contribution to global GDP remained steady at under 3% (See Graph 1, left panel).

What has driven the ascent of these cross-border financial centres in global intermediation? Large economies typically benefit from the concentration of financial activities due to the inherent advantages of scale and diversity. However, G20 nations, which make up roughly 80% of the global GDP, experienced a decrease in their share of global external assets and liabilities from over 65% in the late 1980s to around 55% by the late 2010s (Refer to Graph 1, right panel). This contrasting trend between the shares of G20 countries and cross-border centres highlights factors that might discourage financial centralization. Among these factors are geographical distance between financial entities and clients, and variances in regulation and tax regimes. The former factor was more influential in the early rise of cross-border centres, while the latter has become more prominent recently.

Another category of financial centres primarily caters to local clients and hence has a smaller proportion of international transactions. Often referred to as national financial centres, these are places where major banks have their headquarters and where major stock exchanges operate. Their international dealings mostly involve routing local funds to overseas borrowers and foreign funds to local borrowers. Cities like Istanbul and Mumbai exemplify this type.