A financial center can be defined as a territory or an area where various institutions, local or foreign, that offer financial services are concentrated. It can be a region or a city and the institutions that provide services are banks, investment managers and stock exchanges.
In other words, a financial center can be an entire city where a large number of financial corporations are located. These entities can operate on a national or international scale.
These corporations can include banks and brokers that function as financial intermediaries, as well as institutional investors. These agents can handle the administration of different investments such as pension funds, hedge funds and insurance. There is also the presence of a stock exchange.
Additionally, in a financial center there are companies that provide services such as the presentation of public offers, or, in the same way, the purchase and sale of private shares. Many times they have rating agencies and the provision of services such as accounting and legal advice.
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For this reason, a financial center is a key place for the support of companies and to maintain the commercial activity of that particular place where it is located. Although, if it has a lot of influence, it could affect commercial activity internationally.
Classification of financial centers
Financial centers can be classified as follows:
1. International Financial Center (IFC)
In the first place, we find the international financial centers or IFC by the acronym of its name in English (International Finance Center). These centers are considered in international economics as sites that centralize financial services at a global or international level. Therefore, a large portion of world trade, capital movements and debt instruments are managed through these financial centers.
Examples of international financial centers include London, the United States, and Tokyo.
2. Regional Financial Center (RFC)
Second, there are the regional financial centers or RFC by the acronym of its name in English (Regional Financial Center). These centers, for their part, manage to develop markets, infrastructure and fund management inside and outside the region where they are located. Although, one of its characteristics is that the dimension of its economy is small. Examples of these centers could be Luxembourg, Hong Kong and Singapore.
3. Offshore Financial Center (OFC)
Thirdly, there are the offshore financial centers or also called OFC by the acronym of its name in English (Offshore Financial Center). These generally offer specialized services and are smaller. In addition, they are characterized by having a low tax burden on corporate and commercial services for non-residents. Likewise, they are centers with few regulations, which is why they are very attractive points for investment. In this group, the Cayman Islands and the Virgin Islands can be mentioned as examples.
Why do financial centers exist?
It is important to mention that many companies that have access to large amounts of capital and financial services are concentrated in a financial center. Because of this, mergers and acquisitions are possible. At the same time, you can have access to public offers and different negotiations.
Naturally, companies are grouped in a particular city because it is easier for them to find workers with the necessary skills in places where industry and financial capital are concentrated. It is even easier for workers to change companies and work in another similar one that is close by.
On the other hand, a financial center also favors innovation, since the staff can interact and discuss their ideas with the staff of other companies. This results in a higher level of growth and innovation in the industrial sector. Since these people work in close proximity, it is easier to hold meetings.
As general conclusions, it can be said that:
- A city where a financial center operates can benefit, in fiscal matters, from the taxes paid by the companies located at that point.
- It is called a financial center because the city or the site brings together a large number of institutions that provide all kinds of financial services.
- A financial center attracts many companies and employees that are engaged in financial services, especially. But, in addition, it can capture other types of businesses such as restaurant, hotel and entertainment companies.
- Some of the most important financial centers in the world are New York, London, Shanghai, Hong Kong and Singapore, among a few that can be mentioned.