but the role of Britain’s merchant banks has diversified enormously in
recent years. Although they are called “banks” they are more involved in
providing a range of professional services, such as corporate finance and
investment management, than in lending money.
Building societies.
Building societies are mutual institutions owned by their savers and
borrowers. They have traditionally concentrated on housing finance, long-
term mortgage loans against property - most usually houses purchased for
occupation. Services have been extended into other areas, including
banking, investment services and insurance. The Societies are one of the
main places were people deposit their savings - around 60% of adults have a
building society saving accounts. Building societies offer a variety of
accounts with interest rates related to the time for which a saver is
prepared to tie up his money. So they are major lenders for house
purchases. Four of the largest Societies are planning to become banks. The
largest Societies, the Halifax, Abbey National and Nationwide owe 45% of
the total assets of the movement.
National Savings Bank.
The National Savings Bank is run by the department of National Savings. It
provides a system of depositing and withdrawing savings at twenty thousand
post offices around the country or by post. The National Savings Bank does
not offer lending facilities. Its deposits are used to finance the
Governments public sector needs.
Investing Institutions.
The investing institutions are those which collect savings and invest them
into securities market and other long-term assets. The main investment
institutions are insurance companies, pension funds, unit trusts and
investment trusts. Together they make a vast resource of funds which are
invested in securities and other assets. They own around 58% of British
shares. The British insurance industry is highly sophisticated and serves
millions of policyholders in Britain and overseas. Policyholders include
governments, companies and individuals. The British insurance is the forth
largest in the world and in proportion to its GDP is the highest in any
country. There are 2 broad categories of insurance: long-term insurance for
many years, such as life insurance, permanent health (medical) insurance;
and general insurance for a year or less, which covers risks of damage,
such as loss of property, accidents and short-term health insurance. In
1995 there were about 830 authorized to carry on insurance business in
Britain. The industry as a whole employs some 207.000 people, plus about
126.000 are employed in activities related to insurance.
Lloyd’s is an incorporated society of private insurers in London.
Originally it dealt with marine insurance. Today it deals with other
classes of insurance, today it deals with other classes of insurance. Long-
term life and financial guarantee business is not covered. Insurance
brokers as intermediaries are a valuable part of the insurance market.
Lloyd’s insurance brokers play an important role in the Lloyd’s market.
Institute of London Underwriters was formed in 1984 as an association for
marine underwriters. Today it provides a market where member insurance
companies transact marine, energy, commercial transport and aviation
insurance business. The Institute issues combined policies in its own name
on risks which are underwritten by member companies. About half of the 58
member companies are branches or subsidiaries of overseas companies.
Pension Funds.
Pension Funds collect savings Pension Funds collect savings from
occupational pension schemes and personal pension schemes. Pension
contributions are invested through intermediaries in securities and other
investment markets. Pension fund have a become a major force in securities
markets because they hold about 28% of the securities listed on the London
Stock Exchange. Total Pension fund assets are very big. To protect them the
Pensions Act was introduced in 1995 to increase confidence in the security
of the funds.
Investment trusts and unit trusts.
Both investment trusts and unit trusts offer investors the opportunity to
benefit from pools investments, although their respective structures are
somewhat different. Assets have grown considerably in the last few years.
So individuals are attracted by the possibility to invest rather small
amounts either on a regular basis, usually monthly, or in a lump sum.
Investment trusts companies are companies which are listed on the London
Stock Exchange and must invest mostly in securities for the benefit of
their shareholders. The trusts are exempt from tax on money which they get
within the trusts. Some trusts specialize in particular geographical areas
or in particular markets. At the end of June 1996 there were about 350
investment trusts companies listed on the London Stock Exchange.
In unit trusts the investors’ fund are pooled together but are divided into
units of equal size. Unit trusts are open ended collective funds where the
funds are managed by management groups. The unit trust sector has grown
rapidly in recent years. Nearly three million people are estimated to have
holdings in unit group.
Specialized institutions.
The origin of the London Stock Exchange goes back to the coffee houses of
the 17th century, where those who those who wished to invest or raise money
bought and sold shares of joint-stock companies. Brokers later opened their
own subscription rooms and in 1773 this was named the Stock Exchange.
During the 19th century the Stock Exchange developed as the demand for
capitol grew with Britain’s Industrial Revolution. The Exchange also
financed the construction of railways, bridges and dams across the world.
Today it is one of a number of highly organized financial markets of the
City. It provides trading platform and the means of raising capital for
British and foreign companies, Government securities, eurobonds and
depository receipts. Official list is the Exchanges main market, while AIM,
the Exchanges new market is for smaller rapidly growing companies. It
opened in 1995. Companies which apply for a listing on the Exchange must
provide a full picture of their operations, i9ncluding their financial
record, management and business prospects. If a company wants to join AIM
the rules are less strict. Such companies include multimedia and high
technology business.
Today the Exchange has moved away from face-to-face dealing on the trading
floor to system of dealing from member firms’ offices. The quotations are
displayed on electronic screen. Before 1986 only British companies were
allowed to operate. In 1986 deregulation, known as “the Big Bang” allowed
any foreign financial institution to participate in the London money
market. Other changes involved a system under which negotiated commissions
were allowed instead of fixed rates and dealers are permitted to trade in
securities both as principals and as agents. Traditional retail
stockbrokers are facing growing competition from operations running by
large banks and building societies.
The Exchange has its administrative center in London, with regional offices
in Belfast, Birmingham, Glasgow, Leads and Manchester.
Many companies raise new capital on the London money market. The quiet-
edged market, that is the market of Government shares, allows the
Government to raise money by issuing stock through the Bank of England.
The Exchanges now going through a further period of change which has been
described as the most significant period since “The Big Bang”.
Money markets.
London’s money markets channel wholesale short-term funds between lenders
and borrows. These operations are conducted by all the major banks and
financial institutions. The Bank of England regulates the market. There is
no physical market place; negotiations are conducted mostly by telephone or
through automated dealing systems. The main financial instruments are CDs
(Certificates of Deposit), bills of exchange, Treasury and local authority
bills and short-term Government stocks.
Financial Futures and Traded Options.
Financial futures are legal contracts for the purchase or the sale of
financial products, on a specified future date at a price agreed in the
present. Trading and financial futures developed out of the numerous
futures markets in commodities which originate from London’s position as a
port and from Britain’s need to import food and raw material.
Options are contracts which give the right to buy or sell financial
instruments or physical commodities for a stated period at a predetermined
price.
Financial futures and options are traded on the London International
Futures and Option Exchange (LIFFE) which was established in 1982..
Commodity Exchanges
Britain remains the principal international center for transactions in a
large number of commodities, though the consignments themselves never pass
through the ports of Britain. The need for close links with sources of
finance, shipping and insurance services often determines the locations of
these markets in the City of London. There are futures markets in cocoa,
coffee, grains, rubber, sugar, pigmeat, potatoes there.
Gas, oil for heating and petroleum are traded through the International
Petroleum Exchange, Europe’s only energy futures exchange.
Copper, lead, zinc, nickel, aluminum, aluminum alloys and tin are treaded
through the London Metal Exchange (LME), the world’s largest non-ferrous
base metals exchange.
The Baltic Exchange is the world’s leading international shipping exchange.
It contributed to 292 Mln pounds in net overseas earnings to Britain’s
balance of payments in 1995. Baltic dealers handle more than a half the
world’s bulk cargo, transportation of oil, ore, coal and grain. All
Britain’s agricultural futures markets are operated from the Baltic
Exchange and physical trading and commodities is also carried out there.
Chapter 4.
The International Role of the City of London in the World Monetary and
Currency Fields.
A recent comprehensive study of four world cities - London, Paris, New York
and Tokyo - confirmed many strength of London and described it as possibly
the most international of all world cities. The study said that London and
