Banks

At the Heart of the Financial World

The banks that are found in the City are very different from the high street banks most people are familiar with. Their main function is to ensure that the institutions that come to the City for advice on raising capital obtain access to the money they require to operate or expand.

The City of London has a depth of expertise that has seen it become home not only to UK banks but also to 241 foreign banks: more than in any other country.

Some banks are very large with a number of independently working divisions, others are more specialised. Whatever type they are, each of today's banks forms a part of a comprehensive banking system which straddles the globe.

 

Main points about Banks:

Banks in the City are there to advise and assist companies, publicly owned institutions and governments on how to raise the funds they need.
In the case of companies this could be for expansion or to help manage their cash-flows. In the case of governments this could be to fund large infrastructure projects or to balance their budgets.
Banks are at the centre of most financial transactions and work closely with other banks and institutional investors to provide access for these institutions to the capital (money) they require.
Commercial banks, or banking divisions, offer a wide range of services and advice to companies that help them maximise their profits and trade across the world.
They help institutions raise the funds they require through the provision of loans. They also help companies trading abroad bring the money they have earned back into the country. London is the world’s biggest centre for foreign-exchange trading.
Banks in the City also loan to other banks both in the UK and abroad. London is also the world’s biggest centre for cross-border bank lending. You can find out more about commercial banking here.
Investment banks, or banking divisions, help companies and governments to use the investment (capital markets) to raise funds through issuing and distributing shares and bonds (securities). They also advise clients during company mergers and takeovers.
Investment banks assist clients such as large organisations and institutional investors by trading securities and other financial instruments in the financial markets. Investment banks also trade on their own account (proprietary trading).
The City of London is one of the largest markets for trading many kinds of financial instruments, particularly derivatives (complex financial instruments whose value relies on another underlying asset). The City of London accounts for over 40% of the total traded ($1.4 trillion of daily revenue in 2010). Banks play a large part in this. You can find out more about investment banking here.
 
 

Responding to Change

With so many banks and venture capital companies located in the City, it is one of the foremost centres in the world to raise capital. However, the banking world is constantly changing, influenced by economic and political factors.

In the late 20th century, many smaller banks were taken over by other banks so they could offer a wider range of services. More and more capital was needed to underwrite and distribute securities. Complex computer systems were also required to track increasingly complex markets, especially in derivatives. Some banks in the City became very large. Now they face new challenges.

Since a number of banks found themsleves with insufficient capital, and had to be rescued by the goverment in the credit crunch, new regulations have been put in place. These force banks to hold more capital, so that they can withstand shocks without state aid.

This has seen some banks closing or cutting back on their more capital-intensive divisions, including proprietary trading, which uses the bank’s own money and carries a high regulatory capital requirement. Corporate finance divisions dealing with issuing shares and bonds and advisory teams in mergers and acquisitions are also being slimmed down as a result of lower demand from corporate clients, because of the European sovereign-debt crisis and poor economic climate.

This has seen many banks shrinking their investment banking divisions. There is also a move by government to ring fence commercial banking from the more risky investment banking.