By Leona Liu and Andy Reinhardt
Global Finance: Britain Is No. 1
The World Economic Forum reorders the world of finance by rating Britain and Australia over the U.S.—and booting France and Germany from the top 10
London has officially dethroned New York as the world's top financial center, according to an index released this month by the Geneva-based World Economic Forum (WEF).
The WEF's 2009 Financial Development Index ranks 55 countries on the sophistication and stability of their financial systems and markets. The nations were evaluated according to more than 120 criteria, ranging from the favorableness of their institutional and business environments to the size of their equity and bond markets, and from their technology infrastructure and human capital to the ease of obtaining consumer and commercial loans.
Perhaps the biggest surprise in this year's study—the second release of an annual index launched in 2008—was that Britain rose to the No. 1 spot despite its economic troubles, up from No. 2 last year. Britain was buoyed by the relative strength of its financial markets, particularly in foreign exchange and derivatives, and by its world-beating insurance coverage.
The other headline news—though perhaps not as surprising—was that the U.S. fell from No. 1 in 2008 to No. 3 this year. While the country is still by far the world's wealthiest, financial instability and a noticeably weakened banking sector pulled down its scores. The No. 2-ranked country, Australia, jumped nine rungs in the rankings, thanks to its greater financial stability, low sovereign debt, and ready access to consumer credit.
France and Germany rank 11th and 12th
The results of the study will undoubtedly fuel the ongoing debate as to whether London or New York is the top dog in global finance and markets. Britain's elevation to No. 1 could be short-lived. The country continues to be weighed down by recession, while the U.S. reported a return to growth in gross domestic product during the third quarter of 2009. Britain's institutional environment also could weigh on its ranking next year: The government has been criticized in recent months for excessive intervention in the financial sector, and there is rising concern over increased regulation and higher tax rates, which could encourage London-based hedge funds and other financial intermediaries to move elsewhere.
To be sure, the total scores for most developed nations fell sharply, due to the effects of the credit crisis—and those that suffered the most from lowered financial stability were among the largest industrialized economies. France and Germany, which held top slots in last year's index, fell out of the top 10 altogether, landing at 11th and 12th place, respectively. The sheer size and global nature of these countries' financial systems exposed them more than others to the effects of the downturn.
The fall of such countries as France and Germany allowed developing nations such as Brazil, Chile, and Malaysia to close the gap on their Western counterparts. Nouriel Roubini, an economics professor at New York University and the leading academic for the study, wrote in a summary: "For some of these developing countries, it was a result of learning from the mistakes of past financial crises, while for others it reflected the relative lack of complexity and global integration of their financial systems."
Yet emerging economies have a way to go before they catch up with more developed rivals. Some suffer from underdeveloped infrastructure, murky legal and regulatory regimes, or weak corporate governance. Few score well on financial access for consumers and small businesses, as measured by the availability of credit and the penetration of retail banking services such as savings accounts, microcredit, ATMs, branch offices, and point-of-sale financial services.
Top Nations Still Hold a Vast Edge
Aside from the relative strengthening achieved by developing countries, the most intriguing result for the researchers who put together this year's study was that Australia leapfrogged over the U.S. "While we expected the relative stability of the Australian banking system to strengthen the country's ranking, we were surprised at just how significantly its overall ranking jumped," says James Bilodeau of the World Economic Forum, who co-authored the study with Roubini.
Apart from Australia, all of the countries in this year's top 10 saw significant declines in their overall scores. This highlights how badly the economic crisis shook most major financial systems. What allowed countries such as Britain and the U.S. to remain near the top of the list, despite big hits to their financial stability, was the breadth of other factors taken into consideration. Although their markets have been volatile, these and other top-ranked countries still offer deeper pools of capital, more financial transparency, and a host of other institutional and infrastructural advantages that will likely keep them among the leaders in financial development for years to come.
Still, this is no time for complacency. "The drop in scores for both the U.K. and the U.S. indicate that their leadership is potentially in jeopardy," says Bilodeau. "The potentially worrisome finding is the degree to which scores have dropped and their lead relative to other countries has diminished."
Financial Development Leaders
The annual Financial Development Report from the Geneva-based World Economic Forum (WEF), now in its second year, has already established itself as a must-read for world policymakers and investors. But sorting out which countries have the most-developed financial markets this year was especially difficult because of the turmoil that has shaken the global economy since 2007, when the U.S. subprime loan crisis and subsequent credit crunch unfolded.
With the help of dozens of prominent bankers, academics, and consultants, the WEF evaluated 55 countries, using scores of quantitative and qualitative measures—from the transparency and liquidity of a country's stock markets to the sophistication of its legal and regulatory framework, and from the quality of business education to the availability of venture capital, mobile phones, and broadband Internet access.
Perhaps the two biggest surprises in this year's ranking came right at the top. The U.S.—which has more financial assets than any other country in the world—fell from No. 1 to No. 3 in its overall financial development rating. What's to blame? Profound instability in financial markets and the dollar, poor commercial access to capital, and weakness in the U.S. regulatory and political environment.
The other surprise was Britain's rise to the No. 1 spot, up from second place last year, despite the recession's especially deep bite there. While the country's huge financial sector has suffered from the same instability that hit the U.S., Britain leads the world on a host of metrics, from the density of insurance and volume of foreign currency transactions to dynamic derivatives trading and the liberalization of financial markets.
1. United Kingdom
Rank: 1 (change from 2008: +1)
Per Capita GDP: $43,785
Total Financial Assets: $12.2 trillion
Assets per Person: $199,754
Strengths: Insurance, M&A, securitization, size of banking system
Weaknesses: Financial stability, currency stability, bank efficiency
Despite a deep recession and slow recovery, London's world-beating financial markets drove Britain to the top of the ranking this year, thanks primarily to strength in financial intermediation—derivatives, securitization, insurance, and mergers and acquisitions. Largely due to the turmoil of the past two years, Britain falls short in the stability of its currency and financial markets and it suffers from relatively poor access to credit, low bank profitability, and overly centralized economic policy making.
Notes on data: Per capita GDP is from 2008. Total Financial Assets are from 2007. Assets per capita is an approximation, based on 2008 population data.
Rank: 2 (+9)
Per Capita GDP: $47,400
Total Financial Assets: $3.5 trillion
Assets per Person: $165,535
Strengths: Low sovereign debt, retail access to capital
Weaknesses: Bond market capitalization, commercial access to capital
Australia saw a big jump this year—up nine rungs in the ranking—thanks especially to its strong performance in both bank and nonbank financial services, low sovereign debt, and world-beating retail access to capital. Australia still suffers from relatively weak bond market capitalization and commercial access to capital.
3. United States
Rank: 3 (-2)
Per Capita GDP: $46,859
Total Financial Assets: $58.1 trillion
Assets per Person: $190,930
Strengths: Financial markets and services, stock and forex turnover
Weaknesses: Currency and banking stability, regulation of exchanges
The U.S. leads the world in many financial criteria, especially its well-developed equity and derivatives markets, financial sector liberalization, and dominant position in merger-and-acquisition activity. But with the economy in the doldrums, the U.S. has seen a lack of stability in banks and the dollar and has suffered from tighter access to credit. The WEF also marks down the world's largest economy for its distorting tax system, tendency toward banking and housing bubbles, and institutional drawbacks such as mistrust of politicians and weak regulation of securities exchanges.
Rank: 4 (+6)
Per Capita GDP: $38,972
Total Financial Assets: $789.1 billion
Assets per Person: $167,894
Strengths: Institutional and business environment, bank efficiency
Weaknesses: Public debt, disclosure of financial information
Singapore jumped six places in the rankings, thanks to a high degree of financial stability, bank efficiency, and commercial access to capital. It also leads the world in its institutional environment—such factors as laws and regulations, corporate governance, and contract enforcement. But the city-state also has persistent weak spots, including high public debt and the risk of both sovereign and debt crises. It also has underdeveloped bond markets, relatively weak financial disclosure, and too much centralization of economic policy making.
5. Hong Kong
Rank: 5 (+3)
Per Capita GDP: $30,755
Total Financial Assets: $1.9 trillion
Assets per Person: $270,957
Strengths: Commercial access to capital, financial stability
Weaknesses: Bond markets, securitization, human capital
Like rival Singapore, Hong Kong has a strong business environment and a high degree of financial stability, ranked No. 3 in the world. The WEF also rates it tops globally in the "banking financial services" category, which includes factors such as money supply and the ratio of bank deposits to GDP. Where Hong Kong falls short is in development of securitization (ranked No. 48) and in its nurturing of human capital, with low college enrollment and weak management education.
Rank: 6 (-1)
Per Capita GDP: $45,428
Total Financial Assets: $5.7 trillion
Assets per Person: $169, 831
Strengths: Access to capital, banking stability
Weaknesses: Relatively weak legal rights and official supervisory powers
Canada turns in solid performance on a host of metrics, ranging from the strength of its bank and nonbank financial services to the stability of its banking system—which ranks No. 2 globally, despite Canada's close economic integration with its far more volatile southern neighbor, the U.S. Among Canada's few knocks are low scores for the ease of enforcing contracts, concerns about private and public debt loads, and a surprisingly low per capita penetration of mobile phones—ranked No. 45 among the countries surveyed.
Rank: 7 (no change)
Per Capita GDP: $ 67,385
Total Financial Assets: $2.6 trillion
Assets per Person: $358,096
Strengths: Financial stability, financial markets
Weaknesses: Financial disclosure, investor protection, private debt
Although the country is long known for solid, discreet banks and overall stability, Switzerland has been hurt by the financial crisis—which hit UBS especially hard—and by an aggressive global campaign to chip away at tax evasion conducted via secret bank accounts. The country still ranks high for the size and stability of its banking system, decentralized policy making, and No. 1-ranked management education. But it has work to do in financial disclosure, protection of investors, high bank overhead, and the sluggishness of business creation.
Rank: 8 (+1)
Per Capita GDP: $52,019
Total Financial Assets: $4.0 trillion
Assets per Person: $242,389
Strengths: Corporate governance, intermediation, liberalization
Weaknesses: Banking efficiency, regulatory burden, public debt
With its freewheeling markets—tied for the most liberalized in the world—the Netherlands punches above its weight in the financial sector. A strong institutional environment, technology infrastructure, and foreign direct investment keep the country near the top of the list in financial development. But it suffers from high bank overhead, heavy public and private debt, and relatively weak commercial access to credit.
Rank: 9 (-5)
Per Capita GDP: $ 38,559
Total Financial Assets: $22.5 trillion
Assets per Person: $175,865
Strengths: Large and efficient banks, foreign exchange
Weaknesses: Centralized policy making, currency instability, management education
Japan fell five places in this year's ranking because of the global financial crisis and the instability it introduced to Japan's enormous banking system. The country is still a world leader in the sheer heft of its banking system, which also ranks No. 1 for low operating costs, and it enjoys the No. 3 position in M&A and IPO activity. But Japan's institutional environment, dragged down by over-centralization and mistrust of politicians, weighs on its global ranking, as does weak management education and currency instability.
Rank: 10 (new entry)
Per Capita GDP: $62,626
Total Financial Assets: $1.2 trillion
Assets per Person: $223,691
Strengths: Business environment, human capital, regulation, bank deposits
Weaknesses: IPOs, credit bureau coverage, foreign direct investment
A perennially top-ranked country on all sorts of rankings, Denmark was added to the WEF's study this year and jumped immediately to 10th place. The tiny Scandinavian country boasts the world's highest-rated business environment, thanks to excellent education and technology infrastructure, and the No. 2-ranked institutional environment, due to liberal markets and a strong regulatory regime. Denmark falls down on nonbanking financial services, particularly its weak IPO activity. And it shows shortcomings in financial disclosure, especially in private credit-rating activity.
Rank: 11 (-5)
Per Capita GDP: $46,016
Total Financial Assets: $9.3 trillion
Assets per Person: $149,159
Strengths: Derivatives, infrastructure
Weaknesses: Corporate governance, taxation, cost of doing business
France, which fell five positions in this year's survey, thrives seemingly in spite of the roadblocks it puts up to business. Highly-ranked in bonds and forex, and the world leader in derivatives trading, France also enjoys excellent management education and top-notch communications infrastructure. In addition, its banking system has fared better than many during the financial crisis. The downsides? An inhospitable business climate marred by regulation, high taxation, and public debt; a high degree of centralization; and impediments to starting businesses.
Rank: 12 (-9)
Per Capita GDP: $44,660
Total Financial Assets: $11.9 trillion
Assets per Person: $145,090
Strengths: Tax structure, sovereign currency rating, bank stability
Weaknesses: Bank profitability, cost of insurance, commercial credit access
Though its ranking plunged nine places this year, Germany remains strong overall in financial markets, bank stability, and infrastructure. It scores particularly well for liberalization, bond markets, and the evenhandedness of its tax system—although the tax regime distorts business behavior. On the other hand, commercial credit is tight and loans are hard to come by, banks suffer low profitability, and it's not easy to start a business. German stock capitalization also is weak, relative to GDP, and insurance is expensive.
Rank: 13 (+4)
Per Capita GDP: $47,108
Total Financial Assets: $1.8 trillion
Assets per Person: $166,602
Strengths: Bond markets, retail access to financial services
Weaknesses: Stock market capitalization, public debt
Another small country with an outsized role in financial services, Belgium benefits on the global stage from hosting the headquarters of the European Union in Brussels. It ranks highly in bond market development, banking efficiency, money markets, and retail access to financial services. But it's a bit player in merger/IPO activity and stock market capitalization and turnover. Also weighing on its ranking: high public debt and weak access to commercial credit.
Rank: 14 (-1)
Per Capita GDP: $52,790
Total Financial Assets: $1.6 trillion
Assets per Person: $168,576
Strengths: Corporate governance, regulation, infrastructure
Weaknesses: Retail access to financial services, IPO activity
The powerhouse of the north, Sweden offers a strong institutional environment—especially in corporate governance and legal/regulatory framework—and benefits from excellent infrastructure. It also has a solid currency, a low ratio of nonperforming loans, manageable public debt, and excellent credit bureau coverage. Sweden's soft spots are bank deposits and money supply, weak IPO activity, impediments to startups, and surprising difficulty in enforcing contracts.
Rank: 15 (-3)
Per Capita GDP: $ 35,332
Total Financial Assets: $6.9 trillion
Assets per Person: $152,090
Strengths: Financial services, bond and equity markets
Weaknesses: Commercial credit, corporate governance, regulation
Spain was hit hard by the financial crisis—especially the collapse of its formerly booming domestic real estate and construction industries—and fell three places in the ranking this year. But its globe-straddling companies are still thriving, as evidenced by its No. 4 score in financial services on the back of global banks Santander and BBVA. Spain places well in money supply, retail banking, and M&A transactions. But it suffers from weak commercial credit and venture capital, impediments to business startup, and sub-par corporate governance and infrastructure.
Rank: 16 (-2)
Per Capita GDP: $61,810
Total Financial Assets: $940.8 billion
Assets per Person: $213,818
Strengths: Liberalized markets, insurance, low brain drain
Weaknesses: Tight credit, equity market development, central bank debt
The Irish tiger got mauled by a housing bubble and bank exposure. Ranked No. 6 globally in financial services, Ireland boasts a favorable tax regime, high money market penetration, and top-notch credit bureau coverage. But commercial credit is tight, local financing is scarce, and a large current account deficit threatens the country's ability to scare up funding from around the world. It also suffers from relatively weak infrastructure compared with its European neighbors and overly centralized economic policy making.
Rank: 17 (-2)
Per Capita GDP: $ 95,062
Total Financial Assets: $995.9 billion
Assets per Person: $207,479
Strengths: Governance and government, communication infrastructure
Weaknesses: Insurance cover, foreign direct investment
With a stable currency, low risk of a sovereign debt crisis, and a relatively stable banking system, Norway earns top ratings in the overall financial stability criterion. It also enjoys an excellent institutional and business environment, with especially strong marks for market liberalization, shareholder protection, and management. What holds Norway back is the relatively small size and relatively low profitability of its banking sector, which suffers from low deposit rates and weak money supply.
Rank: 18 (no change)
Per Capita GDP: $ 50,098
Total Financial Assets: $1.3 trillion
Assets per Person: $158,735
Strengths: Retail credit access, bond markets
Weaknesses: Shareholder protection, impediments to business creation
As the financial gateway to Eastern Europe, Austria has benefited from the region's growth as it emerged from Communism and joined the European Union. Austria ranks highly for its institutional environment, retail access to capital, property rights, and low corruption. But it's difficult to start or close businesses, public debt is high, equity markets are underdeveloped, and the country is weak in M&A and IPO activity.
Rank: 19 (+2)
Per Capita GDP: $ 51,989
Total Financial Assets: $717.9 billion
Assets per Person: $135,453
Strengths: Education, communications, ethics
Weaknesses: Financial intermediation
Another Nordic country whose small size belies its global stature, Finland offers an excellent business environment—thanks especially to the human capital produced by its No. 1-ranked educational system—and has among the world's best infrastructure and corporate governance. Efficient banks with few bad loans and strong contract enforcement round out the picture of a country eager to do business. But Finland is relatively weak in financial access, with a small banking sector and limited activity in mergers and IPOs.
20. United Arab Emirates
Rank: 20 (-4)
Per Capita GDP: $ 54,607
Total Financial Assets: $470.6 billion
Assets per Person: $98,042
Strengths: Stable banking system, favorable tax regime
Weaknesses: Risk of sovereign debt crisis, poor disclosure
The top-ranked country in the Middle East, the U.A.E. has earned itself a starring role in the Persian Gulf and broader global economy on the rise of its two largest emirates, Abu Dhabi and Dubai. But the U.A.E.'s WEF Financial Development rating is a study in contradictions. The banking system, rated No. 1 globally for stability, and the No. 2-ranked tax regime contrast sharply with poor scores for the high cost of doing business and the risk of sovereign debt crisis. The U.A.E. also loses points for weak financial information disclosure, poor contract enforcement, impediments to business creation, and low broadband penetration.
Rank: 21 (+1)
Per Capita GDP: $38,996
Total Financial Assets: $7.0 trillion
Assets per Person: $117,223
Strengths: Bond markets
Weaknesses: Corporate governance, contract enforcement
Although it has plenty of assets and a high standard of living, Italy trails behind European counterparts with comparable or smaller economies because of its chronic problems with corporate governance, contract enforcement, and its legal/regulatory framework. It also ranks 52nd in commercial access to credit. In the plus column, Italy is especially strong in bonds while holding its own in equities and derivatives. It's also got lots of bank branches, ATMs, and mobile-phone subscribers.
Rank: 22 (-2)
Per Capita GDP: $8,140
Total Financial Assets: $772.4 billion
Assets per Person: $28,293
Strengths: Stable currency, M&A activity, bonds
Weaknesses: Insurance, foreign exchange, derivatives
The Southeast Asian country performs respectably well across a wide swath of measures, from banking services and financial stability to currency stability. Malaysia earns especially strong marks for legal rights and financial disclosure—where it ranks tops in the world—and for its No. 3-ranked shareholder protection. Areas of weakness include the insurance sector and underdeveloped financial markets, especially in foreign exchange and derivatives.
23. South Korea
Rank: 23 (-4)
Per Capita GDP: $19,505
Total Financial Assets: $2.8 trillion
Assets per Person: $56,656
Strengths: Human capital, insurance
Weaknesses: Commercial and retail credit access
One of the great economic success stories of recent decades, the Republic of Korea has built a favorable business environment, a strong insurance sector, great telecommunications, and excellent human capital, due to high college enrollment rates. But its ranking against peers is dragged down by several significant problems. The legal/regulatory framework and corporate governance are below par, and access to capital for both commercial and retail customers is abysmally limited.
24. Saudi Arabia
Rank: 24 (+3)
Per Capita GDP: $19,345
Total Financial Assets: $810.2 billion
Assets per Person: $32,538
Strengths: Bank profitability and stability
Weaknesses: Scale of banking sector, financial disclosure
Like the U.A.E., Saudi Arabia is distinguished by a high degree of bank stability, efficiency, and profitability. But the sector is small relative to Saudi Arabia's GDP and population of 25 million. Commercial access to capital is quite good and the tax system does not distort. But corporate governance is murky and financial disclosure poor—and Saudi Arabia has a long way to go to develop its human capital.
Rank: 25 (new entry)
Per Capita GDP: $3,421
Total Financial Assets: $71.4 billion
Assets per Person: $12,102
Strengths: Commercial access to credit, size of banking industry
Weaknesses: Current account deficit, cost of doing business
Why does Jordan place higher in financial development than such economic powerhouses as No. 26-ranked China and No. 38-ranked India? For one thing, despite having lower per capita GDP and assets than the other top-25 countries, Jordan outperforms both China and India on those measures. It also has well-developed financial services and equity markets, surprising strength in IPOs, and a stable banking system. Overall, the country's institutional and business environments are ranked higher than those of either China or India. But Jordan has an Achilles heel in financial stability—especially the risk of a sovereign debt crisis—that could harm its ranking in the future.
The rest of the list:
32. South Africa
33. Czech Republic
37. Slovak Republic
40. Russian Federation