Select Committee on Treasury Minutes of Evidence

Background briefing note on Globalisation submitted by the London Stock Exchange



  In recent decades there has been a steady worldwide increase in cross-border financial flows. Banks and institutional investors that previously operated in one geographical area have expanded and consolidated across borders. Investment strategies are increasingly based on sector not geography. These developments have reflected the progressive dismantling of controls on cross-border financial flows and liberalisation of national financial markets.

  In the process of globalisation, technology and financial innovation have played key roles. The rapid development of information systems and telecommunications networks has effectively lowered the barriers to conducting business over long distances.

  However, the integration of financial markets across borders is not a new phenomenon. In the period of the Gold Standard, the mid-nineteenth century to 1914, financial markets were closely integrated at the global level, and in many ways London was already at the heart of the global financial system.

  The international nature of financial markets can be measured in a number of ways. Academics have adopted various techniques, but among them Bordo, Eichengreen and Kim (1998)[6] argue that a good indicator of cross border financial flows is the absolute value of the current account balance over GDP, averaged across a number of countries. They show that this indicator has increased substantially since the mid-1960s, but even today still remains below the levels seen from 1880 to 1914.


  Key drivers of the recent wave of capital market globalisation have been communications technology, enabling the instantaneous transmission of world-wide data, and public policy initiatives towards liberalisation.

  These developments have had immediate consequences for the financial services industry. Bond, money and foreign exchange markets are already global and equity investment is rapidly becoming more international. Increasingly, in many parts of the financial services industry, competitive advantage has begun to replace history and geography as the main influence on industry structure.

  The trends have been significant. For example:

    —  Between 1980 and 2000, it is estimated that the world's stock of liquid financial assets grew seven-fold. (From $11 trillion in 1980 to $78 trillion in 2000—Source IMF/McKinsey analysis).

    —  US cross-border transactions in bonds and equities grew from 9 per cent of US GDP in 1980 to 230 per cent by 1998. (Source: IASB and BIS).


  The London Stock Exchange has, by a significant margin, the world's most active and liquid trading market in international equities.

    —  More international companies than any other Exchange.

    —  More international trading than any other market (55 per cent of total foreign equities turnover)—international equity turnover almost double the domestic figure.

    —  Over 100,000 institutional investors globally accessing London.

  London possesses the funds, market liquidity and the expertise to attract international issuers and investors. London's internationally renowned standards of regulation and disclosure standards give confidence to international issuers and investors.

  The London Stock Exchange's markets now comprise:

    —  1809 UK listed companies—over 99 per cent of all UK listed companies.

    —  Nearly 500 international companies from over 60 countries—more than any other stock exchange[7].

    —  120 international companies from 33 countries listed via depositary receipts.

    —  243 technology companies and 629 smaller growth companies—around 80 per cent of the entire European market in these sectors.


  Securities firms and investment banks are increasingly structuring their international operations along sectoral, product-based lines, with a single Product Head in charge of all international business.

  Many big financial houses manage their global securities operations from London with their global products heads based here, including the following:

    UBS Warburg—Global Head of Equities.

    Deutsche Bank—Head of Global Markets Division.

    CSFB—Head of Global Equity Products.

    Morgan Stanley—Head of Global Core Equity.

    Merrill Lynch—Executive Vice President and Co-President of Global Markets and Investment Banking Group.

    ABN Amro—Global Head of Equities.

    WestLB Panmure—Global Head of Equity Capital Markets.


  London is Europe's pre-eminent financial centre. Demographic changes resulting in a rise in "prime savers" (those aged 40-59), means that prime savers in the US and Europe are expected to outnumber retirees for the next 10-15 years.

  As a result, the value of household financial assets is expected to increase substantially between 2000 and 2010. This is expected to be accompanied by a shift into equities in continental European countries, which London, as Europe's most international market is well placed to exploit.

  It is forecast that between 2000 and 2010:

    —  over 3,000 billion is expected to flow into equities in EU's five biggest economies. [8]

    —  the UK's share of EU institutional equity investment will rise from 11 per cent to at least 22 per cent over the same period.[9]


6   Bordo, M. B. Eichengreen and J Kim (1998), "Was there really an earlier period of international financial integration comparable to today? ", NBER working paper no. 6738, September. Back

7   Main market and AIM companies. Back

8   Source: Goldman Sachs: Global Aging-Capital Market Implications, February 2001. Countries are Germany, UK, France, Italy and Spain. Back

9   Ibid. Back

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