London: Ready for the Euro

Head Table Guests

Douglas Todgham, President, The Canadian Institute for Advanced Research Foundation and a Director, The Empire Club of Canada; The Rt. Rev. Terence Finlay, Bishop of Toronto and Honorary Chaplain, The Empire Club of Canada; Sarah Psutka, OAC Student and Head Girl, Branksome Hall; John Thompson, Deputy Superintendent of Financial Institutions, Canada; Jim Mahaffy, Executive Vice-President, Hong Kong Bank of Canada; Charles Freedman, Deputy Governor, Bank of Canada; Sir Anthony Goodenough, British High Commissioner to Canada; Paul Richards, Special Advisor to the Governor, Bank of England; John Smith, President, British Canadian Chamber of Trade and Commerce and Senior Manager, Global Private Banking, Royal Bank of Canada; Peter White, Chairman, European Union Chamber of Commerce in Toronto and President, Swarski Canada Ltd.; Senator Michael Kirby, Chairman, Senate Banking Committee; Uwe Harnack, President, European Union Chamber of Commerce in Toronto and President, Canadian German Chamber of Industry and Commerce; Patricia Best, Editor, "Report on Business," The Globe and Mail; Paul Cantor, Executive Director, Toronto International Leadership Centre for Financial Sector Supervision; Bryne Purchase, Deputy Minister of Finance, Government of Ontario; and Bart Mindszenthy, Partner, Mindszenthy & Roberts Communications Counsel and a Director, The Empire Club of Canada.

Introduction by George L. Cooke

It is my great privilege to welcome today as guest speaker to The Empire Club of Canada, David Clementi, Deputy Governor, Bank of England.

The Bank of England is the central bank of the United Kingdom. Standing at the financial centre of the City of London, it serves as bank to both the country's government and to its banking system. The Bank of England is responsible for the overall stability of the country's financial system; it is represented on the General Council of the European Central Bank and is closely involved in preparations for the European Monetary Union.

Set up in 1694 the Bank of England is one of the oldest central banks.

David Clementi became Deputy Governor of the Bank of England on September 1, 1997. In addition to his membership on the Monetary Policy Committee, Mr. Clementi is responsible for the day-today management of the bank and, with the passage of the Bank of England Bill, will take on specific responsibility for the bank's work on financial stability issues. David has been heavily involved in the bank's work in preparation for the single currency, including leading the bank's recent Euro Roadshows in New York, Zurich, Tokyo, Singapore and Hong Kong.

Prior to joining the bank, David Clementi worked at Kleinwort Benson for 22 years, where he was Chief Executive from January 1994 and then appointed Vice-Chairman in May 1997. While at Kleinwort Benson, Mr. Clementi played a leading role in the U.K. privatisation programme, including advising Her Majesty's Government on the privatisation of British Telecom, the first global equity issue and the privatisation of the electricity industry in 1991.

David Clementi graduated from Oxford University and qualified as a Chartered Accountant with Arthur Anderson. He then spent two years at Harvard Business School where he obtained his MBA.

Mr. Clementi lives in London and his interests include athletics and sailing.

Mr. Clementi, welcome to The Empire Club of Canada.

Despite the uncertainties of the last few years and the deterioration in global market conditions in the last few months, it is clear that the euro is going to be introduced on January 1, 1999. As you all know, the United Kingdom is not going to adopt the euro as its domestic currency from the start. But the euro is likely to become the core currency for the European wholesale markets in London. The City of London is Europe's leading financial centre; and the introduction of a major new currency on the continent of Europe means that London must have all the necessary trading, payment and settlement infrastructure, as it will play a major part in the conversion process and in the euro markets after conversion.

London will be ready for the euro. What I want to do today is to explain how banks and markets in London will help to forge links between the euro area and the rest of the world. But first I would like to say a word about the U.K.'s approach to the European Monetary Union (EMU) and the impact of the euro on the financial landscape.

We hope that EMU will be a success. The British Government is in favour of joining EMU in principle. The Government has made it clear that it sees no constitutional bar to British membership.

There are advantages. For example, the introduction of the single European currency will help to complete the Single European Market. The uncertainty associated with investment decisions within the euro area will be reduced. Europe will continue its consolidation as a major trading bloc. And the euro will create deeper and more liquid financial markets. The government debt market of the euro area will be almost as large as the U.S. Treasury market and corporate bond and equity issuance, which are currently much lower in the euro area than in the U.S., should grow in size when market conditions are right.

But there are also risks. For example, will the U.K. economy be able to live comfortably with euro interest rates on a permanent basis? And if problems emerge after EMU begins, will a 'one-size-fits-all' monetary policy be adequate to deal with them, particularly if there is insufficient flexibility in product and labour markets? A related concern is the high level of unemployment in some continental European countries, and the differing rates between them.

Consequently, the British Government has set a number of economic tests to ensure that, before the U.K. joins EMU, there will be sustainable convergence between the U.K. economy and the euro area. At the moment, short-term interest rates in the U.K. are approximately twice the core European level.

So the U.K. will not join EMU at the outset. But financial market firms in London, whatever their nationality, see the euro as a key part of their business. With our support at the Bank of England, they have been actively preparing for the introduction of the euro. London thrives on liquid markets, regardless of currency. The introduction of the euro is therefore a major opportunity for London.

From the start, London will act as a link with the euro area by providing a full range of euro services in wholesale financial markets. That includes euro payments and settlement, so that anyone who wishes to do so will be able to trade and settle in euro in London from the first day of EMU. But it also extends to euro banking, foreign exchange and derivatives trading, bond and equity issuance and trading, fund management, financial advice and professional support services as well.

The City of London is Europe's leading financial centre and one of the top three global centres, alongside New York and Tokyo. New York is influenced by the size of the domestic economy. That is true of Tokyo as well. But London's success has historically been due to its international financial business.

London has more foreign banking institutions than any other financial centre and it is the largest financial centre for cross-border bank lending.

The BIS survey, which has just been published, confirms that London is the world's leading centre for foreign-exchange business, with average daily net turnover six times that of Frankfurt.

London is the principal centre for the international bond markets, with 60 per cent of primary international bond syndication and around 70 per cent of secondary market trading.

The London Stock Exchange is the world's largest centre for the listing and trading of foreign equities, and has recently announced an alliance with Deutsche Borse in Frankfurt.

London is the largest centre for over-the-counter derivatives trading, and LIFFE expects to maintain its position as one of the leading futures exchanges in Europe.

London has replaced Tokyo as the largest global fund management centre, and is one of the largest centres for insurance business.

London's position derives from the critical mass of markets and financial services available, and the concentration of the strongest financial businesses from all over the world.

London's strengths include a long track record of innovation and capitalising on new opportunities. The most well known example is the creation of the Eurodollar markets, which American firms in London did so much to promote.

London is in a convenient time-zone between Asia in the morning and America in the afternoon. And English is the language of international finance.

London has an abundance of trading and other financial skills and professional support services--in law, accountancy, tax, property and communications.

London has an unwavering commitment to openness and to welcoming the establishment of foreign firms. In particular, the regulatory framework in London has proved sufficiently adaptable to maintain confidence in financial institutions and markets without stifling innovation and risk-taking. The new Financial Services Authority in London is committed to continuing this approach.

And London is supported by a world-class technological infrastructure which is continually being improved. All these factors help to explain the size of the financial sector based in London. And foreign firms are continuing to move their operations, and in some cases their head offices, to London. In particular, we welcome the commitment which U.S. firms have continued to make to London. It is clear that global financial institutions in the top rank regard London as the place in Europe to be, irrespective of whether the U.K. participates in EMU.

You will have noticed that the factors influencing London's position have little to do with the question of the base currency used either in the U.K. or in Continental Europe. As the City thrives on liquid markets regardless of currency, it will thrive on the euro. Measured in these terms, the introduction of the euro represents an opportunity for London.

We cannot of course be complacent about London's position. London does not hold its pre-eminent position as of right. Its position continually has to be earned. In the run-up to the introduction of the euro, the Bank of England has been playing a key role in making sure that London's global marketplace is prepared for this major new opportunity. And we have been working closely with market practitioners themselves.

We have been ensuring that the necessary financial infrastructure in London is in place so that anyone who wishes to do so can trade and settle in euro in London from the first day of EMU. And we have been promoting agreement between central banks and market practitioners across Europe on practical issues in areas where the market requires a degree of co-ordination, like market conventions.

We have been working with City firms to ensure that they are well prepared for the changeover to the euro in wholesale markets, and in particular for the conversion weekend at the end of this year, when many securities will be re-denominated in euro and cash balances converted to euro.

And we have been providing information to the London market so that firms--whatever their nationality--are as well informed as possible about the technical side of the preparations for the euro. Our quarterly series of publications on "Practical Issues" now has a circulation of over 40,000, of which around 5,000 go directly overseas.

In conclusion, I want to emphasise three points.

First, the introduction of the euro on January 1, 1999 will create a major currency for financing, with significant depth and liquidity.

Second, London will be ready for the introduction of the euro. Anybody who wishes to do so will be able to trade and settle in euro in London from the first day.

Third, as Europe's leading financial centre, we are confident that London will be the international financial centre for the euro. And by providing competitive financial services in euro, London will help to increase the flow of business between Europe and the U.S. The City is not just a major national asset. It is a major asset for Europe and the international economy as a whole.

Additional remarks were made by Paul Richards, Special Advisor to the Governor, Bank of England.

The appreciation of the meeting was expressed by John Smith, President, British Canadian Chamber of Trade and Commerce and Senior Manager, Global Private Banking, Royal Bank of Canada.