The FC Competition – organized by the Institut Louis Bachelier (ILB) and launched in October 2017 – has named the student team that was awarded first prize by an international jury* on 20 June in the Paris offices of AT Kearney.
This scientific day – called “FC Camp” – took place in two distinct stages. During it the two finalist teams in the competition, the members of the international jury* and a large number of experts discussed financial centre attractiveness.
The present report brings you the highlights of this event, that ended with the need to pursue academic research on the attractiveness of financial centres around the world, with the aim of developing a strong and robust methodology by March 2019, the eve of Brexit.
* The FC Competition’s international panel of judges was composed of Michael H. Grote (vice president of academic relations and professor of corporate finance at the Frankfurt School of Finance & Management), André Lévy-Lang (president of the Institut Louis Bachelier and former CEO of Paribas), Simone Manganelli (director of the financial research division at the European Central Bank), Kathy Pain (director of the Globalization and World Cities research network) and Alberto Zazzaro (professor of monetary policy at the University of Naples).
The attractiveness of financial centres is not easy to characterize
The introductory speech by Jean-Michel Beacco, chief representation of the ILB, briefly presented the underlying aim of the FC Competition, namely the development of a database and an index with a robust and transparent scientific methodology with a view to measure the attractiveness of different financial centres. A number of other speakers then took the floor and put forward suggestions as to how this complex subject might be best approached.
Financial centres can assume various forms
The first presentation, from Jean Boissinot, director of financial stability at the Treasury Department, concerned a survey of financial centres and their attractiveness. This study focuses in particular on the existing academic literature and how financial centres are created, a question first raised in 1974 by the American economist Charles P. Kindleberger, who wondered whether their formation depended more on geography or on finance. It is certainly the case that the question of the attractiveness of financial centres lies at the crossroads between several disciplines, thus calling for transversal approaches.
Jean Boissinot then referred to current shortcomings in defining financial centres and their attractiveness. “When we look at the academic literature, it is clear that many elements are missing: a comprehensible cartography, a unique theory, a robust classification, and a measure of the attractiveness of financial centres.” He also pointed out that many questions still lack clearly defined answers. “What is a financial centre? What is its function ? Is there a single system? Which data are used? What is the difference between a local and global financial centre? What about offshore centres and the technological and digital revolution?” Questions that provided food for discussion during the FC Camp.
Financial centres and globalization
In the second presentation, Kathy Pain, director of the Globalization and World Cities (GaWC) research network, spoke about the problem of ranking financial centres in a context of the globalization and financialization of major cities around the world. “Rankings are becoming ever more important with globalization. At the same time, the great world-cities are becoming increasingly finance-oriented and more capital-intensive, particularly with regard to real estate. The creation of a hierarchy between the great world-cities is an major analytical challenge in terms of taking account of data.” The presentation concluded with emphasis on the difficulty of bringing together national and local data in this type of exercise
New York is in pole position for professionals
The third presentation was by Marc-Antoine Autheman, chairman of Euroclear’s board of directors, who offered his viewpoint as a financial markets professional. “The world’s sole global financial centre is located in New York, because it brings together the key players in finance and uses the dollar. For measuring attractiveness, the stock of capital is an important indicator.” However, during his presentation, Marc-Antoine Autheman also referred to China – which is developing various financial centres within its territory – as a possible relay for New York in years to come.
International trade has favoured financial centres
The fourth and final academic presentation of the morning, by Pierre-Cyrille Hautcoeur, associate professor at the Paris School of Economics, provided a historical perspective on financial centres. “A financial centre is located in a specific place,” he explained, “while a financial system is located at the national level and is characterized by interactions among actors. In historical terms, a financial centre is created relatively independently where dense interactions take place. It cannot be created and exist without international trade, because this activity requires credit.” The past offers many such examples, notably Venice and Paris in the 13th century or Amsterdam and London in the 17th century. Even though financial centres are concentrated in large cities, the national aspect is still very important, because the need for liquidity to finance countries’ public debt has, since the 16th century, contributed to the development of banking. In addition, a financial centre also relies on national resources in terms of legislation and accounting.
Regarding the hierarchy of financial centres, Pierre-Cyrille Hautcoeur argues that this has always existed. “There has always been a leader in the history of financial centres. Changes in rankings occur with shocks such as wars and crises, but innovation may also foster change.” While New York and London remain dominant in terms of capital for the time being, it is quite possible that this situation may change within the not so distant future.
The winner of the FC Competition is announced
How should a financial centre be defined? How, using a reliable and transparent scientific methodology, can its attractiveness be measured? Is it possible to build a database and a ranking of financial centres with objective criteria? These were the main questions which the teams of Master’s students participating in the competition worked on over a period of several months.
As a reminder, the objectives of the FC competition were to establish a database and an index in order to measure and classify the attractiveness of financial centres using a scientific and academic methodology including objective, measurable and replicable indicators.
Two finalists left in contention
By the end of February, only two teams remained in the FC Competition: a team of nine students from the University of Orléans and a team of three students from ESCP Europe business school. A number of other teams had previously had to withdraw from the competition.
A promising start
The two remaining teams carried their work through to the final and were rightly congratulated for their efforts. “You have both produced an interesting analysis on how to define financial centres and on the factors that make them attractive,” said Simone Manganelli, director of the financial research division at the European Central Bank and a member of the FC Competition international panel of judges. “Both teams have identified a number of pitfalls and offered different solutions to avoid them. The two solutions are the beginning of something interesting, but both approaches have had difficulties with data accessibility and the problem of endogeneity. Neither of the two solutions proposed is yet operational. Constructing a methodology to establish a valid index is no easy task. This requires time, teamwork and thought. This morning, we have heard some of the ideas to be developed. This afternoon, we will work in groups to come up with more.”
A 6000 euro cheque for the winning team
Even though the two finalist teams did not succeed in developing an approach that could be used straightaway, they still made considerable headway in defining financial centres and assessing their attractiveness. The panel of judges acknowledged the ground covered by awarding two separate prizes: 6000 euros for the winning team and 3000 euros for the runner-up. After deliberating, the panel concluded that the proposal by the University of Orleans team was the most comprehensive, in that it took into account 143 different indicators to rank 97 financial centres, against the ESCP Europe team’s 17 criteria covering 19 cities and in total had the most elaborate proposal.
Working groups make recommendations
For this purpose, small workshops were held with some of the experts present at the first stage of the FC Camp. Each of the three groups addressed a specific theme: the different types of financial centres and their attractiveness; the data to be taken into account in creating an index; and the mathematical methodology to be used.
Proposals to explore in the near future …
After three hours of thoughtful discussion, the three working groups made proposals that will be merged with the proposals from finalist teams during fall 2018, with a view to refining and finalizing a transparent academic methodology with which to measure the attractiveness of financial centres.
Without mentioning them all, the proposals include: avoid predefined categories of financial centres; concentrate on describing the activities of financial centres and the flows between them; observe the networks and links between financial centres, as well as the links between financial centres and the real economy; find the right compromise between the number of cities to be classified and the lack of available data; adopt a top-down approach towards more granularity; define attractiveness with regard to the past and future, and with regard to stocks and flows; structure data; use web scraping to unearth data; and reverse engineer the GFCI index.
… And a new challenge to be met before Brexit
While there is certainly still a lot of work to be done to solve the problem of the attractiveness of financial centres, the FC Competition deserves credit for raising the question and looking at a number of proposals.
Over the coming months, the ILB and its stakeholders (researchers, universities, companies) will continue to reflect on the problem, with the aim of presenting a single or diversified measurement of eurozone financial centres at the upcoming rendez-vous of the next Financial Risks International Forum in March 2019 – just before Brexit.
“Winning first prize in the FC Competition is a great source of pride”
ILB: What gave you the idea of taking part in the FC Competition?
Wassim Le Lann: We found out about the FC Competition though an email from one of our teachers, which included the list of student teams competing. This was our primary motivation for registering and participating.
How did the supervision by the international panel of judges go?
During the various stages of the competition, especially the one in February when we had to present our initial idea, the members of the panel gave us a lot of feedback for improving our study and preparing for the final stage of the contest.
What were the main pitfalls you encountered during the competition?
Apart from difficulties in collecting data, which we were able to make good thanks to the motivation provided by our teachers, the length of the competition and its overlap with the requirements of our university curriculum, especially exams, were not always very easy to manage for the team members. We still managed to get through the various stages, which was a great achievement.
Now that you’ve been awarded first prize by the panel of judges, how do you feel?
Given the time we’ve invested in the competition, we are very happy to have reached the final. As well as the 6,000 euros, in view of the prestige of the ILB, winning first prize is a great source of pride for us, our university and the courses being taken by the members of our team, namely the Finance Master’s and the Econometrics Master’s.
Finally, did the FC Competition stimulate your interest in scientific research?
Yes, very much so. If we have time, we would like to try and improve the methodology developed in our study. I use the conditional, because the next few months will be spent pursuing our studies through work placements for some members of the team. For my part, I want to continue my university studies by doing a thesis on financial econometrics.