Europe poised to overtake US

Europe poised to overtake US
By Peter Thal Larsen and Gillian Tett in London
Copyright The Financial Times Limited 2006
Published: December 13 2006 02:00 | Last updated: December 13 2006 02:00



Europe could overtake the United States as the world's largest source of capital markets revenues this year following a surge in equity and debt issuance and growing financial innovation in the City of London.

A study by McKinsey, the consultancy, found that capital markets revenues from Europe, the Middle East and Africa lagged slightly behind those from North and South America in 2005 but are growing twice as fast.

"London and the Continent may soon become the world's financial powerhouse as measured by top-line numbers," the report concludes.

The study underlines a growing consensus that New York is in danger of losing its crown as the world's leading financial centre as foreign companies rush to raise money in London.

A panel of US economists, academics and executives called last week for an easing of regulatory burdens in order to increase the attractions of the country's capital markets.

However, McKinsey points out that capital markets revenues as a proportion of gross domestic product are lower in Europe than in the Americas, suggesting that Europe has more room to grow. "Structurally, Europe should overtake the Americas sooner or later," said Markus Böhme, a principal in McKinsey's Munich office.

Revenues in Japan and the rest of Asia still lag well behind the west but penetration of capital markets products is also much lower.

The study, based on detailed data from 30 global, regional and national banks, estimates that revenues from global capital markets are likely to exceed $250bn this year.

London has long been known for having a lead over New York in foreign exchange. However, it is now providing increasingly fertile ground for the development of new, over-the-counter derivatives.

Indeed, some argue that London has displaced New York as the main centre for this type of activity. That may be because Europe has traditionally had a weaker cash bond market than the US - forcing investors to use higher margin derivatives products to a greater extent.

It was notable, for example, that it was Europe which first created constant proportion debt obligations (CPDOs) this summer - a credit instrument that has since become wildly fashionable in the credit markets.

Similarly, the newly emerging market for longevity bonds, which are now being developed by some investment banks, looks set to be centred on London, not New York.

Europe produced greater profit in 2005, McKinsey found, with pre-tax profit of $31.3bn compared with $29.5bn in the Americas and just $13.8bn in Japan and Asia.

Large investment banks control almost two-thirds of the market in the Americas. But in Europe regional and national banks account for more than half the business.