Sydney IFC, Lucy Turnbull, and bizarre CIFR research.

A research paper, financed by Australia’s CIFR (“Centre for International Finance and Regulation”) and prepared with the – clearly ultimate – purpose of promoting Sydney as an International Financial Centre (IFC), was presented at a Sydney seminar on 8 December.

The authors made the bizarre suggestion that the NSW State Government “focus on initiatives that drive population growth” so that Sydney can become a more important IFC. More precisely, they suggested that Parramatta (a suburban area of the larger Sydney geographical region) be more closely incorporated into the Sydney CBD (central business district) area to contribute to building a “mega” city that could be more highly ranked as an IFC.

The authors of the report, somewhat strangely, began their presentation with a video clip of Prime Minister Malcolm Turnbull. The event ended with comments from Lucy Turnbull (the wife of Prime Minister) who is a former Lord Mayor of the Sydney CBD area, and is the chairperson of new entity called the Greater Sydney Commission — which covers, amongst other places, both the CBD and the Parramatta suburban area, and will be heavily involved in overall (ie “greater”) “Sydney” planning.

The “focus on initiatives that drive population growth” suggestion is bizarre because it will not help “Sydney” (however defined) to become a more highly ranked IFC, and because most people will think that there are more important issues for Lucy Turnbull and the Greater Sydney Commission to consider.

The research paper’s analysis is sometimes sloppy and the underlying data does not always pass the smell test. Its conclusions should be taken with many grains of salt!

The paper, “What turns cities into international financial centres?”, was prepared by Professor Dariusz Wojcik (of Oxford University), Dr. Erik Knight (Sydney Business School), and Vladimir Pazitka (Oxford).

On the positive side, the CIFR report does attempt to be more rigorous than the Z/Yen semi-annual “Global Financial Centres Index” (GFCI) in assessing the factors that are paramount in the creation of IFCs. The CIFR report is based on various data sources rather than the subjective voting used by the GFCI measure and should be welcomed on this basis.


The table below shows the CIFR rankings based data, which the report’s authors describe in the following way:

“A combination of capital markets data from Dealogic and city-level data from Oxford Economics, enhanced with information from Bureau van Dijk’s ORBIS and Bankscope, as well as corporate websites. Covering the period 2000-14, this dataset allows us to estimate the gross revenues from nearly 600 thousand capital market transactions (equity, debt, syndicated loans, and M&As) worldwide, identify fees from cross-border deals, and assign these to cities hosting the operational headquarters of the subsidiary of the principal financial advisor that conducted the transaction. Thus, we obtain the first measure of international financial activity that we are aware of, based on the actual business transactions in cities.”

The table also contains the GFCI 18 rankings for September 2015, so apart from anything else the data time periods are quite different.

CIFR RankingsCity“Cross-border fees” for 2000-2014 (2012 $US bil)GFCI 18 (ie Sept 2015) Rankings City Ranking Index
2New York125.22New York788
3Zurich100.43Hong Kong755
9Hong Kong9.99San Francisco712
10Sydney5.110Washington DC711
20San Francisco1.420Osaka699
24Los Angeles0.824Busan690
25Beijing0.825Tel Aviv687

The most startling difference between the two rankings is the low CIFR ranking for Singapore, while Hong Kong also does not rank well.

Singapore with a (current) population of about 5.5 million had “cross-border fees” in the 2000-14 period of $US2.7 billion, while Sydney with a (current) population of nearly 5.0 million had “cross-border fees” of $5.1 billion.

My rough guess is that Sydney’s per capita income is similar to that of Singapore, so economic activities other than “cross-border fees” must be generating more income in Singapore than in Sydney.

Of course, Sydney provides domestic services (including financial) to a country of 24 million, whereas the city-state of Singapore is much smaller. While Singapore does provide many non-financial services to the international market, the low numbers for international financial services (represented by “cross-border fees”) does seem odd.

The authors note that “foreign firms interested in M&As in a country often hire advisers operating in that country”. As Australia is a significant target for foreign investment, this may be a factor in Sydney’s high “cross-border fees” numbers.

The CIFR report authors note that they “have focused on cross-border deals, defined as those in which a financial adviser works for a client of a different nationality than their own”.

Of course, the use of the term “international” could be seen as suggesting that an IFC should be identified as such only on the basis of its third country activities – ie only taking into account flows that do not have any fundamental direct relationship to the country where the IFC is situated. That is, the financial adviser should work for a client whose transaction has no intrinsic relationship to the country where the financial adviser is located.

If such a measure was used, Sydney’s ranking as an IFC would be likely to take a significant hit while that of Singapore would be boosted. And, London’s position would be even more impressive.

The numbers for Toronto also stand out. With a (current) population of about 6 million (20% more than Sydney and a 10% more than Singapore), Toronto received “cross-border fees” of $32.9 billion in the 2000-14 period – over 6 times that of Sydney and 12 times that of Singapore! But, more on this below!

In considering the data, it is worth noting (as the CIFR report acknowledges) that the numbers do “not cover transactions in asset management, insurance or non-syndicated bank lending” (or presumably futures). The CIFR report’s footnote on this adds: “Investment banking activity that we cover, however, arguably represents a major part, if not majority of cross-border financial transactions, as it is more globalized than asset management, not to mention insurance or non-syndicated lending.”

In my view, this ignores the fact that for some IFCs asset management, insurance etc are very important activities. The world of IFCs is more complex than the CIFR authors seem to appreciate.


The authors of the CIFR report say “the study identified key drivers of city performance and the size and scale of their impact”. These are provided in a summary:

Finding 1: “EU membership is a very significant driver of a city’s performance in winning cross-border investment banking fees”, and they suggest that this is due to “the ease of labor flows between countries”. At the 8 December seminar, that authors suggested that this was a reason for the UK to remain in the EU.

In my view, Toronto’s very high “cross-border fees” may be due to its closeness to the US border and to a number of large US cities. If so, London’s location next to wealthy Europe may be more important than EU membership.

Finding 2: “Workforce flexibility is an important factor, which we define as the number of weeks of statutory redundancy pay. The less flexible the workforce, the worse the effect on financial centre performance. ” The authors say: “This is surprising, but it probably says something about the ‘ease of doing business’ and willingness of firms to engage in M&A activity in markets where the transaction costs of labor restructuring are lower.”

I have no comment on this.

Finding 3: “Size of a city’s population is an important determinant of IFC activity, so all things being equal, cities that have the ability to grow their population will outperform.” The authors say: “This puts Singapore and Hong Kong at a disadvantage because their ability to grow their populations is limited by space constraints. However, this constraint can be mitigated by mobility of skilled labor across borders. It also means that having a very large population is not enough. This has implications for China”.

Note the comments: “… all other things being equal …”; “…a very large population is not enough …”!; “…mobility of skilled labor…”!

Their statistical analysis shows something, but the authors make little attempt to explain what influences what, or why! In my view, the authors do not have any idea of the importance of why — or indeed, if — city size really matters, which makes their recommendation for Sydney bizarre.

Finding 4: “Cities need to have Times Higher Education World University Rankings Top 500 universities in order to be IFCs. This is significant, as universities were the only institution in our model that were economically significant at the macroeconomic level, and drive international competitiveness. Specifically, they were more important at a national, rather than city, level. If you can attract talent nationally to your country, they will easily move between states or cities.” The authors say: “This puts in context the importance of universities as economic institutions. They are a major portal for skilled migration, but they are also an important status symbol for national economies that are seeking to grow cross-border business deals.”

In contrast to the first sentence above, the text of the main CIFR report says: “We found no evidence that the presence of top universities matters at the city level.”

This contradiction may just be due to sloppy summarization of the findings, or it might be one of several examples of the authors trying to make their report seem more relevant by trying to latch onto to some contemporary issue.

In my view, there are significant questions over the real world relevance of the university ranking system used by Times Higher Education. But the “status” claim might be real.

Finding 5: “To be an IFC, a city needs to be the largest domestic financial center in its national jurisdiction. Where there are a number of domestic financial centers competing with each other, they tend to detract from each others’ international performance”. The authors say: “In servicing off-shore clients (our measure of international competitiveness), organizations are advantaged when they concentrate resources in dominant cities, as opposed to spreading themselves too thinly across multiple cities”.

I basically agree with this view, but particularly when it comes to Australia with its IFCs (ie Sydney and Melbourne) located so far from much of the world. Australian should concentrate any IFC building efforts on Sydney. However, it also might be that Sydney should concentrate IFC building efforts on its present CBD area rather than trying to include the Parramatta suburb which might result in “greater Sydney” having fragmented IFC activity and international visitors being hit with additional travel after long international flights to Sydney.

Finding 6: “Having a stock exchange is an important factor in achieving IFC status. The level of sophistication of the stock-market is not particularly important”. The authors say: “Whereas stock market presence may have been a historical source of advantage for cities, it is now par-for-course. Our data suggest that there is no obvious advantage accruing to more sophisticated stock markets”.

I agree with this view.

Finding 7: “The concentration of investment banks and professional service firms is very important. Having a concentration of corporate advisers contributes to the creation of an IFC, but only up to a point.” The authors say: “Competition from offshore law firms, investment banks and accountancy firms helps stimulate cross-border business for Sydney and should be encouraged.”

I totally agree with this view.

Finding 8: “Competition in non-financial sectors, especially amongst international players, is a significant factor. The financial sector follows the real economy, not the financial economy”. The authors say: “Measures that drive competition in the real economy are significant for an IFC – more so than specific-sector measures that don’t fall into the above categories”.

I agree with this general sentiment, but it was very strange that (in their presentation on 8 December) the authors showed a slide which said: “Competition in non-finance sector is crucial eg Harper Competition Review (esp s45, s46, s47 of Corps Act), cross-media ownership”

The Harper Review is really about the Trade Practices Act rather than the Corporations Act, and section 46 of that Act is very contentious with no change in wording likely to make it less so (as I know from my own policy work on this issue a number of years ago). My bet would be that the authors added this comment to their presentation because they want their report to appear relevant to contemporary issues – even if they have little understanding of what these issues are!

Finding 9: “The presence of asset managers was not a decisive factor. Furthermore, we did not find local infrastructure, as measured in terms of the number of metro stations in a city, or the number of secure internet servers per million people as statistically significant.” The authors say: “This suggests that whilst these factors may be significant for population growth, their relationship to international competitiveness of financial sectors in particular is too indirect to be statistically significant.”

I am not sure what the first sentence is trying to say, given that (as noted earlier) the data used in this report does not cover “asset management”.

I was shocked that the “number of metro stations” was initially thought to have any possible significance. Having lived and worked in Sydney (no metro station) and both Shanghai and Moscow (both with many metro stations but very different metro systems), I can see no reason to use this measure – it is just not relevant! There are a number of alternative sources of transport, and many people with higher incomes prefer not to use metro lines.

The use of the “the number of secure internet servers” is more defensible, but the issue of “quality” is also very significant. In my view, the greatest impediment (part from the rule of law) to Shanghai becoming a top-ranked IFC in the medium-term is the Chinese government’s restrictions on the internet – both in terms of access to particular sites, and the effect the general “fire-wall” restrictions have on internet speeds (and use of internet-based financial trading platforms).

Finding 10: “The ability to enforce contracts is extremely important in establishing an IFC.” The authors say: “This places China at a relative disadvantage in the Asia region, and is a source of competitive advantage for Sydney.”

I totally agree with this.


The CIFR report’s attempt to bring more logical to the evaluation of IFCs is welcome.

However, some of the conclusions and recommendations of the report smack of an attempt to be politically relevant – and my view on this was reinforced by the (senseless) playing of the Malcolm Turnbull video at an event at which his wife (holding an influential position, albeit on her own merits) was present.

Overall, the CIFR report is interesting for the new data that it presents, although I am highly suspicious of the accuracy of some of it. As a tool for formulating government policy, the CIFR report at best adds little to what we already know – and is thus basically useless. At worst, the CIFR report may empower mindless ideas of boosting the population of “Sydney” in order to become more of an IFC.

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