Driving the growth of international financial centres : an econometric analysis of capital markets and the banking sector

Abstract

The study of International Financial Centres (IFCs) has been extensive and interdisciplinary. Within the plethora of studies undertaken on IFCs, the respective roles of the banking sector and capital markets in the development of their national economies have been explored. However, the literature has failed to address the effects of the growth or contraction of both banking and capital markets upon the IFC in which they are established. Understanding how changes to key components of an IFC affect its growth and development can create a more comprehensive picture to help interpret changes in the global financial environment.

To ascertain the relative importance of the banking industry and capital markets to the growth and development of an IFC this research conducted an econometric panel data analysis across ten IFCs from 1996 to 2010. The banking sector will be measured in terms of the total bank assets attributable to banks which declare an IFC included in the study to be their headquarters. Likewise, capital markets will be quantified in terms of the total market capitalisation of the stock exchanges located within a specific IFC. The growth and development of an IFC will be measured, by proxy, according to the total size of its labour force in financial sector related employment. The data was analysed using ordinary least squares regression to provide in depth analysis into the relationships between the chosen variables. This study also adds additional depth by contextualising these findings with observed affects such as the legal origin of the IFC and its level of regulation related to both capital markets and the banking industry.

The findings of the research demonstrate that both the banking industry and capital markets have a significant affect in driving the growth of IFCs, but the effect of the capital markets is more substantial. This is not the case when comparing developed and developing IFCs. In developing IFCs professional and business services employment is driven by both capital markets and the banking sector; as they seek to build a solid foundation on which to develop their IFC. The thesis seeks to discuss its findings in terms of the bank based verses market based financial system debate, finding that both theories have different merits based on the level of financial development with the IFC.