The City of London under strain: is the financial district at a turning point?

ImageAprès la démission de Bob Diamond à la tête de la célèbre banque Barclays, son nouveau PDG Anthony Jenkins a annoncé le 12 février dernier lors d’une interview à la BBC une vague de licenciements au sein du grand conglomérat bancaire britannique. Ces mesures, qui concernent principalement les sites en Grande-Bretagne et aux Etats-Unis, bouleversent aujourd’hui la City, cœur de la finance britannique et mondiale. Quelle est la situation actuelle du fameux quartier financier londonien ?

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The City of London: overview.

The City is a 3-square-kilometer London district that has its own mayor, its own police and an antique tradition of business and finance. That is what made it successful. The City of London registered already 140 companies when the London Stock Exchange was created in 1801. Since then, the City has grown and encompasses now more than 500 banks and insurance companies. It benefits from privileged links with 30 former British colonies (Jersey, Isle of Man, Bahamas), which are some of the 60 tax havens. Thanks to its growth, the City financed the industrial revolution and made the UK’s modernization possible.

Thatcher’s reforms allowed the City to be the first financial district in Europe and the third in the world after New York and Tokyo. Indeed, in the 1980s, the City was over-regulated and very elitist; it was then surpassed and could no longer compete with foreign centres of finance. Thatcher tried to prevent disaster by reforming the financial market in 1979 and above all in 1986 with a package of measures known as ”the Big Bang”.

With free-market rules and unfettered competition, the City has become a hotspot for finance, making more money everyday. Its ever-increasing number of buildings and skyscrapers bears testimony to its power in the UK. Indeed, from the Tower 42 inaugurated in 1979 for the National Westminster Bank to the Swiss Re Building (the Gherkin) and the future Bigshopgate Tower, one can easily understand why the City represents 13% of British GDP. Great Britain therefore naturally relies on its financial sector to sustain growth and keep the country afloat.

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Between scandal and crisis.

Since 2008, as the financial area was at the heart of the global economic crisis, the City of London has undergone a lot of trouble. Not only did the financial sector lose a lot of its credibility and experience economic hardships but the City also faced the crisis of the Libor Scandal.

First of all, even though Tony Blair’s government encouraged the booming financial sector to invest in social projects, this sector is today often seen as a world of “overpaid buffoons” fuelled with bonuses. The British people developed a feeling of hostility towards the City of London, stirred up by the huge amount of money the government spent to save financial institutions. The fact is most banks encountered difficulties because of their worldwide speculation and thus, help from the government was often decried. 
Another reason for this feeling is the rise of poverty in Britain. Indeed, the deregulation of the financial sector and the growth of the City went along with the rise of income inequality.

Besides, banks in the City also faced dramatic economic issues. Barclays reported a drop of its profits of nearly 246 million pounds this year. Moreover, banks had to lay off massively: Barclays plans to make 3,700 of its employees redundant and UBS, that has a large part of its employees in the City, even decided to lay off up to 10,000 people. As if that were not enough, the City became stuck in another credibility crisis in the same period because of the Libor scandal.

The Libor (London Interbank Offered Rate) is a benchmark estimated by the largest banks in London in three currencies (US dollar, Japanese yen and British sterling), which is supposed to reflect the average interest rate paid when one bank borrows money from another. However, from 2008 on, articles and studies from renowned institutions such as the Wall Street Journal or the Bank Of England revealed fraudulent manipulation of the rate by leading banks. Indeed, banks had interests in manipulating the Libor: it allowed them either to profit from their financial positions or after the crisis, to lower the rate in order to seem healthy. In April 2008, the Commodity Futures Trading Commission opened an investigation to question the reliability of the Libor followed by the UK’s Financial Authority. A large number of banks were involved but the two main banks concerned were UBS and Barclays (one of the Big Five, namely the five largest banks in Great Britain).

The scandal later spread around the world and on other interest rates such as the Tibor (Tokyo) or the Euribor (Europe). In order to stop these illegal practices, Cameron ordered in June 2012 an independent review into the workings of interbank lending rates. Finally, the UK’s regulator announced a complete overhaul of the Libor late in September. And the scandal did not come to an end. No earlier than this month, RBS (Royal Bank of Scotland) was also involved in the scandal.

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Despite these great difficulties, the City still has the power to reverse the current trend, as well in public opinion as in economic growth. This is the goal that Anthony Jenkins set himself to save Barclays: “construct a better bank”, “focus on the long term” and “make money in the great way”. Let’s see if the financial district takes its chance to make a fresh start.

Benjamin BAILLARD, Inès JOLY and Clémentine ROURE

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