As the UK unwittingly approached the 2007 global banking crisis, London’s financial sector – known simply as the City, or the Square Mile – was reaching the height of its powers. One in every £12 of British economic output was generated by financial services, and bankers were labelled masters of the universe.
The crash punctured those illusions, and rebalanced the UK economy slightly (albeit at painful cost): output from financial services and insurance slipped from 8.3% of 2007 UK GDP before banks were bailed out to 6.3% in 2019, according to the Office for National Statistics (ONS).
The UK’s departure from the EU has prompted further soul-searching in the City, as some business leaves these shores. Yet it could be some time before other sectors can challenge the financial sector’s importance in the UK economy.
London’s central place in the world economy is in no small part a legacy of Britain’s empire, with banks oiling the wheels of colonisation. By 1919 the economist John Maynard Keynes could already compare rich Londoners to kings of old, ordering exotic luxuries and able to “adventure their wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages”.
Keynes was writing after the first world war, just as the British empire was waning. The City of London survived the second world war, but by the 1960s, after the austere postwar years, it was in danger of becoming a backwater, as the power of the UK and sterling declined.
That changed as London positioned itself as a legally secure centre for the movement of dollars – but one outside the reach of US regulators. London’s central role in these offshore transactions, known as the eurodollar system, means deals worth trillions of pounds wash through the City every month, even if only a tiny proportion of any real economic activity actually takes place within the UK’s borders.
Average daily turnover in foreign exchange reached $3.6 trillion in April 2019, according to the Bank of England’s latest survey. Trade in derivatives – contracts used by companies to protect themselves against market movements – was worth $3.7tn in the same period.
Helped by the “big bang” in the 1980s – a policy of deregulation by the Conservative government under Margaret Thatcher – the “City” overflowed the bounds of the ancient walls of London, which are marked by cast-iron dragons. The deregulation, which allowed foreign firms to undercut the fat commissions of London’s old boys’ network, attracted banks from the US and elsewhere to the Canary Wharf redevelopment in the East End.
Across Britain, financial services and related sectors such as accounting and law now employ more than 2.3 million people, according to TheCityUK, a lobby group.
Two-thirds of those workers are outside London, but the concentration of the best-paying jobs in the City is a significant factor in regional inequality. The ONS reports that the median Londoner earned £736.50 a week in April 2019, £150 more than the average Briton.
The flip side of that inequality is that the City is a big contributor to government coffers. The UK financial services sector contributed £75.6bn in tax in the year to March 2020 – a record – according to the City of London Corporation, the body that governs the Square Mile as well as lobbying for its financial and professional services.
Catherine McGuinness, the corporation’s policy chair, said the City was playing a vital role in the UK’s economic recovery during the pandemic, including giving out loans and deferrals on a sixth of UK mortgages.
“The UK continues to lead the world when it comes to financial and professional services but now is not the time to rest on our laurels,” she said. “In order to rise to the challenges facing us, we need to invest in infrastructure and skills across the country.”
Yet the UK’s reliance on the City extends beyond the chancellor’s budgets: London’s cultural life is just as dependent on the finance industry. The Donmar Warehouse theatre is supported by Barclays, and art exhibitions at the Tate galleries are backed by Bank of America, BNP Paribas and Deutsche Bank.
Banking’s influence on Britain’s sporting life extends from the rarefied atmospheres of the boat race between Cambridge and Oxford, and Lord’s cricket ground – sponsored recently by Wall Street giants BNY Mellon and JP Morgan respectively – through to the football Premier League, whose last title sponsor was Barclays.
For London-based clubs the City provides access to the lucrative prawn sandwich brigade, with corporate hospitality offering healthy earnings for clubs including Arsenal and Chelsea, whatever the objections from more nostalgic fans.