Few financial centres have been unaffected by the financial chaos in London and New York. Due to globalisation, the liquidity crisis which started in the US mortgage market is now blowing through almost every financial market, making 2008 an annus horribilus for the financial services industry.

Speaking to a delegation of international bankers, Pierre Mirabaud, chairman of the Swiss Bankers Association, said: “This is absolutely no time for schadenfreude.”

Yet, despite difficult international credit markets and the inappropriateness of taking delight in the misfortunes of London and New York, the crumbling of dominant financial centres may, in the long term, open opportunities for up-and-coming financial centres, particularly those with little exposure to investment banking.

Smaller centres rising

Despite a large concentration of financial power in London and New York, smaller financial centres, which have developed rapidly in the past 10 years, are becoming highly competitive in niche markets. Many smaller financial centres do not expect to lose a single institution, or in many cases even a single job loss, while some banking centres, such as Switzerland, are still optimistically forecasting long-term growth in financial sector employment.

In September, in the midst of the financial meltdown on Wall Street, Switzerland announced a strategy to boost financial sector employment from 200,000 to 280,000 by 2015 by encouraging hedge funds and private equity firms with tax incentives and sympathetic regulation. However, other financial centres, such as the Cayman Islands, which has more than 200 companies as well as partnerships with Merrill Lynch and Lehman, may take longer to recover.

Sonja Kohn, chairman of Austria’s Bank Medici, says: “In Austria, we don’t expect a fall in financial sector employment, in fact I am not aware of a single person being fired yet from an Austrian bank.” Like leading Austrian banks, most foreign banks in Vienna are also focused on eastern Europe, which unlike more mature markets is far from over-leveraged and less affected by the crisis. Many banks in the region, including Bank Medici, are still making a return on equity of more than 20%.

Mrs Kohn says: “[Austria] was very wise not to build its business in secrecy but to concentrate on location and service, although we did miss out on the derivatives business.”

Like Austria, Madrid’s growing financial sector is looking stronger and healthier than many other financial centres due to conservative regulation and close links to growing emerging market economies in Latin America. Isabel Martin Castella, general manager of the Madrid Financial Centre, says of Spain’s financial sector: “We used to complain about conservative regulation, but now we can see the benefits.”

Crossborder acquisitions

Mrs Martin Castella says that like all financial sectors, Madrid is suffering from the global disappearance of bank liquidity, but that this has created further opportunities for cross-border acquisitions: “This crisis is likely to provoke a further wave of consolidation in which some smaller institutions will disappear and some big banks will become bigger.”

Spain’s largest international banks, BBV and Santander, have remained more focused on commercial rather than investment banking, giving them an advantage over counterparts in the UK, Germany, France and the US. While Spain’s banks move up the ranking of the world’s largest financial institutions, further acquisitions – such as the takeover of UK bank Alliance & Leicester by Santander in July for just E1.25bn, about half of what the bank had been worth six months previously – seem a distinct possibility.

Certainly, Spanish banks are in a good position to grow overseas in the next few years and Mrs Martin Castella says that the banking crisis may be an opportunity for Spanish banks to export a business model that has so far proved successful, and disaster-proof.

Like other financial centres, Madrid has developed its own niche, focusing on its cultural heritage to position itself as the European hub for Latin American finance. With the US markets in the grip of financial turmoil, Madrid is likely to make headway against its main rival, Miami. In 1999, it launched Latibex, the first and only international market for Latin American securities and has more recently begun to target financial investment from Islamic institutions.

Specialist services

In the Netherlands, the Dutch authorities are also trying to position themselves as a specialist financial market, encouraging, for example, all financial services relating to retirement, financial logistics (including e-payment systems, and information and communication technology) and the sustainable investment sector.

Akkie Lansberg, managing director of the Holland Financial Centre, says: “Financial centres need to be recognised as centres of expertise in a few sub-sectors where they can excel and make their mark globally.”

The Netherlands’ financial sector, which employs about 300,000 people and is Europe’s second largest market for equity derivatives, behind London, is the region’s humble giant. Robin Fransman of the Holland Financial Centre says: “This crisis is not the end of innovation, although it may be the end of one branch on innovation. For example, the lack of liquidity and pricing, particularly in the over-the-counter [OTC] derivatives market, may simply mark a return towards more transparent banking and the transfer of OTC instruments into the exchange traded market. Do not forget that we all benefited from derivatives, which made it possible for banks to offer lower mortgages for years.”

While the financial crisis is choking economic growth in Europe, the effects on Asia’s newer financial centres, which have flourished with the region’s economic growth in the past 10 years, remain less clear.

Economic growth created huge demand for financial services in countries such as Korea, Malaysia, Singapore and Thailand. In Korea, as in many Asian countries, asset management is now the fastest growing financial sector.

Kun Young Kim, deputy director of Korea’s Financial Services Commission, explains that Korea’s asset management industry was given a head start by the country’s national pension fund (which had more than $2200bn in assets at the end of 2007) and large foreign exchange reserves (more than $260bn in 2007).

Mr Kim says the government’s focus on creating a financial centre specialising in the asset management industry also underpins growth in other financial markets: “The development of an asset management industry can lead to the growth of the securities, bonds and derivatives markets, and this will, in turn, stimulate the development of the financial centre in Korea.” Mr Kim says that the country’s adoption of a new investment code will further help the country’s growing asset management industry.

Middle Eastern growth

However, perhaps the world’s fastest growing financial centres are now in the Middle East. New regional financial centres have developed across the Gulf in the past decade, fuelled by high energy prices and huge infrastructure and real estate investment. Citibank’s recent relocation of two of its most senior bankers to Dubai, including its global co-head of investment banking, indicates how important the Gulf region has become.

In Qatar, which only recently set out to create its own financial centre, the country’s new regulator has granted nearly 100 licences during just three years of operations. Steve Martin, marketing and communications director of the Qatar Finance Authority, says: “Qatar has identified about $145bn-worth of investment in the economy and wants to grow its own financial centre, establishing closer relationships with companies helping to finance these projects.”

Mr Martin adds: “The willingness of some firms [to relocate to Qatar] may be affected by their current strength, but this may also be an opportunity.” He says that if there are job losses in the financial sector, some may consider relocating to the Middle East, where qualified staff are still hard to find.

“We are seeing changing attitudes towards the region, particularly at a time when the financial services sector is reeling from the credit crunch while the Middle East as a whole is benefiting from high energy prices.”

IN FOCUS

Yorkshire forward: Three-year plan

In the UK, development agency Yorkshire Forward has announced that it is to invest £2.45m ($4.4m) as part of a £3.24m three-year plan to support growth in the region’s financial and business services industry.

The Leeds Financial Services Initiative (LFSI) will contribute about £780,000 to the programme, working in partnership with Yorkshire Forward during the next three years to raise the profile of the sector, lobby on its behalf, help the existing market to grow and encourage new investors.

Simon Hill, executive director of business at Yorkshire Forward, says: “The financial and professional services sector has experienced huge growth in the Leeds city region during the past decade and Leeds is now one of the biggest financial centres outside London. It is also a vital link in the supply chain for other regional industries and is a significant asset for attracting inward investors.”

Kevin O’Connor, chairman of LFSI adds: “Leeds Financial Services already has good brand recognition and this initiative will enable us to better position the Leeds city region as a major European financial region and meet increased competition from other major centres within the UK and from overseas.”

In Leeds, financial and business services account for more than one in four jobs and have created more than 40,000 jobs in 10 years; in the wider city region the sector accounts for about 300,000 jobs and includes major financial sector employers such as HBOS, Provident Financial, Abbey, Yorkshire and Skipton Building Societies.