Edward Gibbon wrote about the decline and fall of the Roman Empire and, for a few years now, I have been thinking about whether London can continue its dominance as an important financial centre. I am starting to think that we might be witnessing the decline and fall of the London empire. In a way, London is a city-state which bears little resemblance to the rest of the country. The European Banking Authority has become a Rottweiler and is insisting that, from next year, any banker who earns more than 500,000 will be affected by a EU-wide bonus cap. Such employees will have variable pay restricted to the same level as salary, or twice that level with explicit shareholder approval.
If implemented in full, this law would have two clear consequences. First, the compensation of London-based bankers would shrivel. Secondly, most investment bankers would want to work for non-European institutions and work outside Europe. Surely, New York, Hong Kong, Singapore and Dubai will all benefit at the expense of London. Of course, not all cities welcome the financial sector with open arms. A well-connected source recently told me that Singapore was becoming less keen on expanding its banking sector because the total assets of its financial services sector were ballooning as a percentage of overall GDP. Didnt that happen in Iceland before the Nordic countrys banks defaulted in 2008?
It appears that there is a trend whereby many of us consider ourselves to be citizens of a global village and much less constrained by national borders than were our parents. Consequently, there is an argument that London might continue to thrive because it is still an attractive destination for wealthy people from emerging market countries such as Brazil, India and Russia, as well as Arabs escaping the turmoil in the Middle East. However, I dont believe we will see the financial services industry dominate the UK capital, as it did in 2005-07, for many years to come.
Is this perhaps why Paul Tucker, deputy governor for financial stability at the Bank of England, has decided to resign after spending his whole career at the hallowed central bank? Most commentators consider that Tuckers departure is a consequence of the appointment of Canadian central banker Mark Carney to head the Bank of England. Tucker was considered a strong contender to succeed Sir Mervyn King and it is unprecedented for a foreigner to get the top job. The kerfuffle over Tuckers involvement on the edge of the Barclays Libor manipulation scandal probably did not help his candidature. Tucker might have seen Carneys arrival as both a direct snub from UK chancellor of the exchequer George Osborne and as a career-limiting event.
Apparently, Tucker will now spend a period in academia in the US. This sounds blissful to me. I have met Tucker several times and have always found him approachable and interesting. Carney has signed up for just a five-year term. In my June column, I hinted that his tenure might be more tempestuous than commentators are expecting. His compensation package and high profile might have put some Bank of England insiders noses out of joint. Carney might not find it easy to effect change.
So it might be that in 2018 Tucker looks a compelling candidate to be the next governor of the Bank of England. And while we are on the topic of central bankers on the move, president Barack Obama recently hinted that Ben Bernanke, chairman of the US Federal Reserve, might be stepping down in January 2014 when his second term formally ends. In a press interview, Obama stated that Bernanke had, "already stayed a lot longer than he wanted or was supposed to." Bernanke took over at the Fed in 2006 and a lot has happened since then. His departure might worry markets as his successor (the frontrunner is said to be his deputy, Janet Yellen) will almost certainly be responsible for overseeing the withdrawal of the munificent gift of quantitative easing.