Lessons of the Financial Crisis for the Attractiveness of European Financial Centers

This empirical analysis addresses the attractiveness of European financial centers. The presented research tackles an issue that is fundamental to the understanding of organizational behavior in finance – the rationale in the decision-making process of market participants and its consequences for an economy. The results provide a unique insight into market participants' views on factors that affect the locational attractiveness of a financial center over time, taking into account assessments before, during, and after the financial crisis. This analysis of market participants' views is carried out by explaining their assessment of financial centers' attractiveness with their assessment of central influencing factors.

In particular, the results reveal that cluster concentration with a speedy information exchange within dense social networks is a competitive advantage. In comparison, an existing specialized pool of labor without concentration seems not to be relevant, as the human capital factor is relatively mobile in an increasingly integrated Europe. Furthermore, governmental support and parameters of regulation strongly determine a location's attractiveness for financial institutions, whereas the level of taxation seems not to be important on the micro level. Despite some progress in establishing a level playing field in the EU, the financial market is not yet fully harmonized and countries can take different paths in regulation as long as there is scope for interpretation. Hence, even minor differences in financial regulation within the EU may lead to regulatory arbitrage. Overall, financial centers' attractiveness varies over time, in comparison to relatively persistent location factors. The findings do not hinge on differences in market participants' socio-economic background. It is shown that fund companies seem to value the attractiveness of a financial center much more than banks, insurance companies, and corporates.

Lang, Gunnar (2012), Lessons of the Financial Crisis for the Attractiveness of European Financial Centers, ZEW Discussion Paper No. 12-080, Mannheim.