The rise of international financial centres in bank-based and market-based financial systems

“International Financial Centres” (IFCs) such as London or New York are one of several contributing factors toward the continued economic success of their respective countries in the twentieth-century. Other countries have attempted to create their own IFCs with mixed successes. This study examines factors that might predict the appearance of IFCs and the differences in financial scale. Of particular interest is the debate between ‘bank-based’ versus ‘capital-based’ financial systems and how it impacts the growth and success of IFCs. Results suggest that bank-based systems are marginally more effective at promoting and benefitting from IFCs. Stronger financial market regulations are also positively associated with the growth of IFCs and the resulting benefits that they provide to the rest of the economy. Together, this suggests that the optimal policy mix to promote IFCs may involve some degree of government involvement beyond strictly maintaining free and fair financial markets for the private sector.