John Gieve: London, money & the UK economy Speech by Sir John Gieve, Deputy Governor of the Bank of England, at The University of Surrey, Guildford, 26 June 2007. *  *  *  Introduction The past year has been one of rapid growth and record profits for much of the financial sector worldwide. The strength of the world economy has provided a favourable wind but the spectacular growth of derivative markets and the spate of leveraged buy outs have also fuelled the growth. And, of course, London has been at the centre of the story. In a speech in March I discussed the renewed ascent of London as a centre of international finance and concluded that it was based on powerful economic forces which were likely to persist. 1 I showed how the leading position London built up in the days when Britannia ruled the waves gave it a strong comparative advantage based on language, law, time zone and, above all, by a concentration of expert labour. This allowed London to maintain an important role in international finance even while Britain’s overall economic and political position was eroded. In the last twenty years we have seen a resurgence in the City which has established a strong position not just in traditional markets like foreign exchange, where its share is around 30% of trading, but in new products, with a share in OTC derivatives markets over 40%.
Over the last 10 years, for example there has been a striking swing in employment with rapid growth during the dotcom boom followed by a sharp fall and subsequent recovery (Chart 5). 3  The UK is a net exporter of financial services, running a surplus in 2006 of £ billion (or 2% of GDP) on financial services and insurance. North Sea oil production peaked in 1999, and in 2006 was nearly 40% below this peak. 2  BIS Review 73/2007  That reflects a strong cycle in financial sector profits (Chart 6) which is an international phenomenon – indeed, in the last 10 years major European financial firms and US securities dealers saw an even bigger cycle in their profitability than major UK financial firms (Chart 7). The same is true for earnings (Chart 8). This reflects the importance of bonuses which account for around 20% of remuneration in the financial sector compared with around 5% across the economy as a whole. The figures in the City itself can be considerably higher. A figure of 50% is common in investment banking, in which a rough rule of thumb is that firms distribute about half their pre bonus profits to staff. It is estimated that 4200 workers in the City received bonuses worth more than £ in 2006/07. Of course the growth in those bonuses is contributing to the widening inequality of incomes at the top of the earnings distribution.