City steps out of New York's shadow

London Briefing Chris JohnsLondon is in danger of becoming a tale of two cities. First, there is the City of London, the not very geographically accurate description of the financial district. The other is all the rest. The divide can be seen in a number of ways, but none is more apparent than in salaries.

The City still has its roots in the "square mile", an area that begins where the West End finishes and stops where the East End starts. The river is its southern border, while the northern boundary is, loosely, marked by Old Street and the Clerkenwell Road. Financial firms have not restricted themselves to the City for a long time: in the 1980s, Salomon Brothers (now part of Citigroup) lived in a cavern above Victoria station and another "bulge bracket" giant, Credit Suisse First Boston , occupied offices a stone's throw from Oxford Street. Both firms have subsequently moved East, now residing in Canary Wharf.

The corporation of London is the local government authority charged with maintaining the vitality of the City and has been resisting, with only partial success, the drift of financial firms to the East and West. Huge investment banks have been moving to Canary Wharf, availing of cheaper rents and the enormous dealing floors - and trophy tower blocks - that are available in abundance. Investment management firms - particularly hedge funds - have largely avoided the square mile and have set up in Mayfair. The shopping is good but limited in the City. In Mayfair, you can spend your mega bonus on Bond Street.

The success of the financial services industry has a long history. London enjoyed "first mover advantage": with the UK first to industrialise, the necessary financial innovation wasn't far behind. But the City only began to become a global leader in the 1960s, when the US made one or two policy blunders that encouraged money market and bond trading to migrate from New York to London.

Regulation has been an important part of the City's success story: London has benefited from US regulatory blunders and has always made sure that the burden of red tape is less than that in Paris or Frankfurt. In this game it's not the absolute level of regulation that matters, you just need to ensure that you have less than the next city. Having a large pool of educated English speakers helps, as does sitting in a time zone that fits neatly between the Americas and Asia.

Reports of the City's demise have been heard many times over the years. When I first moved from the UK treasury 20 years ago I was told - by someone who is now a very senior civil servant working for Gordon Brown - that I would be unemployed within six months because of his forecast of a structural decline in City jobs.

When sterling failed to join the single currency, many commentators gleefully forecast a rapid fall in the City's global standing. Firms were expected to move to Frankfurt and Paris to avail of the EU's working time directive and other rules and regulations that assist the smooth running of global financial markets. As we all know, London has thrived and has become the centre of trading for most things euro-related.

But London has always lived in New York's shadow. The world's largest economy contains, inevitably perhaps, the world's largest financial centre, and most of London's largest employers are now American. But a key part of London's success story has been a complete indifference to the ultimate providers of the jobs. Just imagine if Citigroup had tried to buy Paribas!

Amazingly, some people are now beginning to speculate that we are no longer running second fiddle to New York. The chairman of Bear Stearns, another large Wall Street investment bank, has been reported as saying that London is no longer the second city. Just one opinion, but that it can be said at all is indicative of something.

London's high earners are part of the reason that the property market is starting to rise. Bonus season is just finishing and it is clear that estate agents are starting to smile again. The global M&A boom means that investment bankers in London will have another bumper year, and buy more central London property.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.