[Financial Microscope] U.S., U.K., and Japanese Policy Financial Institutions Clustered in Capitals and Financial Hubs... "Relocation Must Not Disperse Them"

All Major Japanese Policy Financial Institutions Clustered in Otemachi, Tokyo
U.S. Places Policy Institutions in Washington, Market Operations in New York
Key Functions in London for the U.K. as well
Korea Must Consider Agglomeration Effect

The United States, United Kingdom, Japan, and other major countries show a clear tendency to locate policy finance institutions in their capital cities or major financial centers. In Japan, key state-owned financial institutions and the deposit insurance corporation are concentrated in Otemachi, Tokyo. In the U.S., policy finance institutions are located in Washington D.C., while financial market operations are centered in New York. As the Korean government is considering including a large number of financial public corporations in the second phase of relocating public institutions, there are concerns that the core functions of policy finance must be preserved to prevent the loss of clustering benefits.

According to an analysis of disclosures from major nations' financial institutions and reports from the Bank for International Settlements (BIS) and the Bank of England on August 19, it was found that institutions which directly interact with financial markets or closely cooperate with governments, central banks, and supervisory authorities are generally located in capital cities or major financial centers in these countries.

All Japanese Policy Finance and Deposit Guarantee Institutions in Otemachi; Distinction of Policy and Market Functions in the U.S.

In the United States, the Export-Import Bank of the United States (EXIM), the U.S. International Development Finance Corporation (DFC), and the Federal Deposit Insurance Corporation (FDIC) all have headquarters in Washington D.C. The Board of Governors of the Federal Reserve System, which oversees monetary policy and financial supervision, is also based in Washington.

The execution of financial market functions is handled by New York, the financial center. When the Federal Open Market Committee (FOMC) sets monetary policy direction, actual trading of government securities and open market operations are carried out by the trading desk of the New York Federal Reserve Bank. Policy functions that require close collaboration with the government and Congress are situated in Washington D.C., while functions directly tied to bond and foreign exchange markets are located in New York.

In the United Kingdom, the Bank of England, UK Export Finance (UKEF), and the Financial Services Compensation Scheme (FSCS), which provides compensation to depositors and investors in the event of financial firm failures, are all based in London. Japan's Japan Bank for International Cooperation (JBIC), Development Bank of Japan (DBJ), Japan Finance Corporation (JFC), and the Deposit Insurance Corporation are densely clustered in Otemachi, one of Tokyo's key financial and business districts.

France's Caisse des Dépôts et Consignations (CDC) is headquartered in Paris, while Public Investment Bank (Bpifrance) is based in the Greater Paris area. KfW, Germany's Reconstruction Credit Institute, is based in Frankfurt, Germany's largest financial center.

There are cases where state-owned financial institutions are located outside the capital or financial centers. The British Business Bank (BBB), for example, is headquartered in Sheffield. However, about 300 employees of the British Business Bank are split equally between Sheffield and London. The National Wealth Fund (NWF), responsible for infrastructure and decarbonization investments, is headquartered in Leeds. The British Business Bank does not function as a typical bank that accepts deposits or makes direct loans to enterprises. Instead, it mainly supports indirect finance by providing guarantees, equity investments, and funding to private banks and funds, which then evaluate and distribute funds to small and medium-sized enterprises. Therefore, the need for its location in a major center is relatively lower.

The History of Financial Cities Is the History of the 'Clustering Effect'

The development of financial centers is closely tied to the history of the clustering effect in the financial industry. When banks, securities firms, asset management companies, brokerages, insurance companies, law firms, accounting firms, and large corporate headquarters are concentrated in one area, information flows rapidly throughout the industry and it becomes easier to secure specialized talent.

In its report "The Enormous Role of Cross-Border Financial Centers," the BIS found that network effects and economies of scale and scope drive financial activities to concentrate in a small number of centers. As the number of market participants increases, the cost of connecting capital seekers and investors decreases; when specialists gather, it forms a structure where more companies and capital flow into the cluster.

The competitiveness of the financial industry derives from specialized talent, professional services such as law and accounting firms, and the spread of knowledge and information. When financial companies are concentrated in one area, it is easier to find needed personnel and advisory services quickly, and non-public market information and transaction experience can also be shared through human networks. Clustering of banks, brokerage firms, asset managers, intermediaries, and enterprises enhances access to industry and real economy information and facilitates the recruitment of specialized professionals.

The clustering effect grows in importance as work becomes more complex and information-dependent. Representative cases include foreign exchange, bond, and derivatives transactions, large-scale project financing (PF), acquisition finance, and corporate restructuring. For large overseas PF deals, businesses, syndicates, export credit agencies, institutional investors, law firms, accounting firms, and insurers need to hold repeated, in-depth negotiations about project structures and risk-sharing conditions. Similarly, the physical proximity of creditor banks, courts, government and financial authorities, accounting firms, and potential buyers is crucial for speedy negotiations in corporate restructuring, thus increasing productivity. This is why institutions like Korea Development Bank and Export-Import Bank of Korea, which are directly involved in corporate finance, investment banking, overseas PF, and restructuring, are especially sensitive to the benefits of financial market clustering.

However, in retail finance and regional SME finance, access to first-hand information about client businesses and local industry is more important. In these fields, headquarters typically set policy and risk management standards while local branches or regional financial firms are responsible for consultations and evaluations. Thus, the efficiency of regional relocation versus clustering in a financial center depends on the nature of the work.

"Seoul Is Optimal... Clustering Effect Must Be Prioritized"

As discussions on the second phase of relocating public institutions to local areas intensify, experts point out that the location of state-owned banks should not be determined by the same standards as general public institutions. The prevailing view is that remaining in Seoul, where financial companies, businesses, institutional investors, and specialized talent are concentrated, is the most efficient. However, if relocation is inevitable, it is argued that relevant institutions should be grouped in a single region to create new clustering effects.

Yang Joon-suk, professor of economics at Catholic University, said, "Looking at New York, London, and Tokyo, clustering financial institutions in one place greatly contributes to competitiveness," adding, "Even with the development of the internet and computer networks, state-owned banks must often move back and forth between the executive branch and the National Assembly, so dispersing them to multiple regions can create major inefficiencies." He continued, "For financial institutions, Seoul is the most efficient, but if relocation is necessary, options such as concentrating them in Sejong, where government ministries are based, or Busan, where financial institutions are already gathered, should be considered." He argued that decisions to scatter institutions across multiple regions should be avoided.

This content was produced with the assistance of AI translation services.