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This question is about the City of London, i.e., the Square Mile, not greater London.

There are an awful lot of international banks located in the City of London. What advantages are there to having a bank located here?

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    Some explanation is given here. Note that London also has a secondary business district at Canary Wharf. – Steve Melnikoff Oct 10 at 19:59
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    The City of London Corporation has quite a lot of power, separate from the rest of London and the UK. The council is mostly elected by businesses based in the area. So it could allow banks to avoid financial regulations, and transfer money into tax havens. newstatesman.com/economy/2011/02/london-corporation-city – vclaw Oct 11 at 0:06
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    @vclaw: That seems based on a gross misunderstanding of UK politics. So there's a member of parliament from the City of London? All MP's in the UK are elected in their own geographical district; the UK has no Proportional Representation. The City doesn't get to make its own laws; Parliament makes laws for the UK (still within the confines EU binding legislation). This differs from the Cayman Islands which are self-governing, so the analogy in the article is really flawed. – MSalters Oct 11 at 19:39
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    @MSalters The City of London doesn't get an MP, but it gets someone called the Remembrancer whose job it is to show up to Parliament to make sure that they don't pass any laws that would inconvenience the City of London. – nick012000 Oct 12 at 6:43
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    How is this a question about personal finance? – David Richerby Oct 12 at 19:26
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Historically, one reason is that the needs of "modern" banking (that which emerged during the 18th century) more-or-less required that banks were close to each other, since much of their business with each other – in particular the settling of payments by cheque – was conducted "in person". Quoting from the section 17th–19th centuries – The emergence of modern banking on Wikipedia's History of banking page (my emphasis):

The modern bank

In the 18th century, services offered by banks increased. Clearing facilities, security investments, cheques and overdraft protections were introduced. Cheques were invented in the 1600s in England and banks settled payments by direct courier to the issuing bank. Around 1770, they began meeting in a central location, and by the 1800s a dedicated space was established, known as a bankers' clearing house. The London clearing house used a method where each bank paid cash to and then was paid cash by an inspector at the end of each day. The first overdraft facility was set up in 1728 by the Royal Bank of Scotland.

As bank grew, and spread throughout the country (or acquired the provincial banks already there), the process of cheque clearing expanded: many cheques would be cleared locally (many/most cheques drawn on banks in, say, Bristol, would be presented to customers of other banks in Bristol), but those that weren't would make their way back to banks' head offices in the City of London where they would be exchanged at the Bankers' Clearing House on Lombard Street.

Similarly, for most of its history (up until the so-called "Big Bang" of 1986), trading on the London Stock Exchange was done in-person on the floor of the exchange. It therefore made sense for the companies involved to be located nearby.

During the late 19th, and early 20th centuries, as banking became more international, it would be natural for foreign banks to also congregate in the City of London, as that was where the exchanges and other banks were: they would want proximity both when negotiating deals and for day-to-day settlement. (While at university in the early eighties, I had summer jobs with what was then Morgan Guaranty Trust. They, like other banks, had an army of couriers who went on several "runs" throughout the day delivering cheques, shares and other legal documents to other institutions in the "square mile").

With the advent of electronic trading (on the stock exchange) and the rise in electronic payments (BACS – Bankers' Automated Clearing Services; similar to ACH in the United States), there has been a shift towards digital proximity being more important, which – together with more modern facilities – is probably behind the rise of Canary Wharf and the surrounding Docklands as London's second financial centre.

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    In particular, the clearing rules allowed the same day settlement of cheques exchanged within the City of London, which would correspond to walking distance of the clearing house. These cheques were called “walks” items. Cheques between banks outside the City would usually take 3 days to clear. Cheques drawn on branches which had Town clearing had a T printed after the sort code at the top right hand side. (Own knowledge and: chequeandcredit.co.uk/information-hub/history-cheque/… – Owain Oct 11 at 19:15
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    Indeed, so the messenger boys could run between them.... – mckenzm Oct 14 at 1:18
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The main advantage to the City of London is that all the big banks are there. So there’s a large pool of experienced employees, there are legal firms with vast experience in the banking industry, there are accountancy firms with vast experience in the banking industry, there are secure courier companies and good telecommunications and temp agencies with lots of banking staff, and in general everything is set up to service banks. If you try to put your international bank’s European head office in Birmingham, you will have none of these things available.

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    I don't see how this distinguishes the square mile of the City from areas immediately surrounding it. – DaveInCaz Oct 11 at 15:50
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    I am not familiar with the City of London. I know Washington, DC better. All the metro lines converge at Metro Center. If you locate your office near Metro Center, it is a convenient commute for everyone in the DC area. If you locate your office outside, then almost everyone will have to commute to Metro Center change lines and then proceed to your office. If offers are competitive the one near Metro Center will win. I have to believe it is similar in London. – emory Oct 11 at 16:37
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    @emory It’s not similar in London, which is a much larger city with a much more extensive Underground network. There are many other areas that are just as commutable as the City, which only occupies a small part of central London. – Mike Scott Oct 11 at 16:44
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    @MikeScott sounds like a nice place – emory Oct 11 at 16:57
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    Not all the big banks; some of them are at Canary Wharf, a few miles to the east of the City. – Steve Melnikoff Oct 11 at 22:01
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Quite often competitors co-locate in order to increase business. Some business owners, see as it negative when a competitor moves in "across the street", but some see it as a positive.

An example of this is the diamond district in NYC. People come from all over the world to buy and sell their diamonds. They do this because of selection, and the convenience of finding an alternative if their first or fifth attempt at a transaction does not work out.

Another is in my town. The wife and I were in the market for some new furniture. We went to "furniture row", about 20 furniture stores within 3 miles. The brand we selected could have been purchased within a few minutes drive from our home, but instead we drove across town so we could shop around.

In a similar way, many world wide cities have "banking", or "garment" districts. Grouping together help serve their customers better, increases bushiness, and they can also work together on certain projects.

It is impossible to say why London specifically has a international banking district, but this pattern is repeated world wide for many different industries.

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    "It is impossible to say why London specifically has a international banking district". London is a major port, (was a) manufacturing and trading city, as well as being the national capital. It's only natural for there to be many banks in London. – RonJohn Oct 10 at 17:23
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    Savannah, GA is second (or so they claim) only to NY/NJ ports in annual shipping tonnage, yet they have no international banking district. Sure there are some international banks, but no such district. – Pete B. Oct 10 at 18:07
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    As of 2014 years ago, they weren't in the top 5. bts.dot.gov/print/node/206571: #1 Port of South Louisiana, Houston, NYC/NJ, Beaumont. New Orleans used to be a major banking center. – RonJohn Oct 10 at 18:12
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    @RonJohn But that doesn't explain why all the banks in the area would be concentrated in a single square mile. The ports are equally accessible to the entire metropolitan area. – Barmar Oct 11 at 18:45
  • @Barmar: “The ports are equally accessible to the entire metropolitan area” — try getting to them from Watford during rush hour. I'll wait. – Paul D. Waite Oct 14 at 9:49
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To supplement the present answers: one important reason was to ensure that Britain's financial leaders could be summoned quickly during a crisis. That changed when the market was deregulated by Margret Thatcher.

Until then the Bank of England had insisted that all of London's banks had to be within 10 minutes' walking distance of the governor's office so, it was said, in a crisis he could summon the lords of finance to his parlour with half an hour's notice.

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In fact, City of London is a Tax haven as point out by article like this. It is administered by City of London Corporation and not under the jurisdiction of Greater London.

This explains why even with a property price tag of £17,371 per m², there are many companies willing to pay the premium rent to open a business there. And you can bet even with all those "cost-cutting practices", those bankers are not going to move out of the City of London to save the rental.

p/s: Tax haven has nothing to do with how Bank paying tax. Banks are taking a cut by "helping" their client by "saving tax". One can read how the operation inside City of London is saving companies tax.

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    The fact that many City firms have opaque tax arrangements does not make the City a tax haven. Aside from negligible local taxes, the tax treatment of a City bank is exactly the same as that of a non-City UK bank. Indeed, many of the hedgies and PE firms that article complains about are in Mayfair, which is not in the City. – AakashM Oct 11 at 9:33
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    Can you elaborate on what tax benefits in particular are enjoyed by banks in the City of London which they don't have in the city named London? – Philipp Oct 11 at 11:29
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    Big banks are bad, we get it. But you don't get to redefine 'tax haven'. And you haven't shown (probably because it's not possible) how operating in the City is any different from operating outside the City. Canary Wharf isn't in the City, but your linked sources are just as down on Canary Wharf businesses... – AakashM Oct 11 at 12:13
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    The City of London is not a tax haven by any reasonable definition. And saying that "Tax haven has nothing to do with how Bank paying tax" shows that you do not understand what a tax haven is. – DJClayworth Oct 11 at 13:53
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    I read the whole linked article (despite the ridiculous level of hyperbole, the "experts" which are quoted but never named and the meandering from one topic to the next seemingly without any connection), but the best I can understand it the argument seems to be that the City is a tax haven because the banks are involved in money laundering? – Voo Oct 11 at 23:24
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This is not only typical for banks in London, but to other types of businesses everywhere. Similar businesses tend to stick close together, an interesting phenomenon explained in Why do competitors open their stores next to one another?, an animated lecture by Jac de Haan.

Basically, if there is a physical distance between you and your competitor, then customers located between you and your competitor will more likely be going to you if you moved closer. If you moved further away, you would lose those customers.

Yes, unlike ice cream stands on a beach selling similar ice cream, the choice of a bank does not solely depend on how far it is from you, but it might play at least some role.

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