The New York City Financial Services Cluster

Darla Moore School of BusinessRegional Cluster Development and Competitiveness

Loucas AnagnostouLoucas.Anagnostou@maec.moore.sc.edu

22 October 2015

Loucas Anagnostou

New York Financial Services Cluster

Executive Summary

New York City is one of the most competitive cities in the world. The New York

Metropolitan Area has a huge diversification of clusters, ranging from business services to

biopharmaceuticals. As a result of the intense and productive competition in the area, New York

contributes a significant portion to the U.S. economy that has led to powerful growth for many

decades. However in 2008, the U.S., as well as the rest of the world, paid the price for the financial

institutions’ enormous profits that were based on deregulation, subprime lending and

overleveraging. Since the crisis, U.S. financial services institutions have not fully regained the trust

from their international counterparts and clients. Coupled with steep corporate tax rates and stiff

rent, retaining operations within New York City has proven to be quite challenging for many

financial firms. Therefore, the city’s primary focus should be to relax corporate taxation, followed

by an effort to make office and housing space more affordable.

Despite the recent crisis, New York City has been the global epicenter of financial services,

which makes it the world’s largest cluster in the industry. The core of the cluster is located in

Manhattan, and more specifically Wall Street, with financial firms dating back to the 19th century.

The most essential competitive factors of the cluster are the huge antagonism among the firms, a

strong collaboration between corporations and the government, multiple perks of urbanization, as

well as top tier educational institutions. The main competitive weaknesses of the cluster would be

the detriments of urbanization, high corporate taxation, and a weak and naïve regulatory and legal

environment. Future policy should be tailored to make laws and regulations more enforceable and

robust, so as to improve the corporate climate, regain trust and keep innovation constant.

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Table of Contents

Executive Summary………………………………………………………………………...1Table of Contents………………………………………………….………………………..2I. About New York City……………………………..……………………………………....3Geography………………………………………………………………………………..…...3Demographics……………………………………………………………………………........3Economic History…………………………………………………………………………..…4II. Economic Development......................................................................................................5U.S. Macroeconomic Outlook……………………………………………………………...………..5Economic Profile…………………………………………………………………………………….5Current Issues………………………………………………………………………………………..5III. Regional Competitiveness…………………………………………………….…………7New York City Diamond……………………………………………………………….……………7Demand Conditions…………………………………………………………………….……………7Factor Conditions………………………………………………………………………..…………..8Firm Strategy & Rivalry………………………………………………………………………..…..10Related and Supporting Industries………………………………………………….....……………12IV. New York Financial Services Cluster Analysis…………………………..……………13New York Financial Services………………………………………………………………………13Overview……………………………………………………………………………………………13U.S. Financial Services History…………………………………………………………………….14Mapping the Cluster………………………………………………………………...………………15Related and Supporting Industries………………………………………………...………………..15Firm Strategy and Rivalry…………………………………………………………………………..19Factor Input…………………………………………………………………………………………22Demand Conditions………………………………………………………………………………...23Policy Recommendations…………………………………………………………………………..25V. Conclusion………………………………………………………………………………26VI. Bibliography……………………………………………………………………………27

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I. About New York City

Geography

The State of New York is located on the Northeast coast of the United States, facing the

Atlantic Ocean. New York City is placed on the mouth of Hudson River, where it forms one of the

largest natural harbors in the world. The city itself is composed out of five counties: Manhattan,

Brooklyn, Queens, Staten Island, and the Bronx. Neighboring states include New Jersey,

Pennsylvania, Connecticut, Massachusetts and Vermont.

Demographics

The city’s port became the main point of entry for the waves of immigrants in the 19th and 20th

century. Naturally, not only did New York City’s population increase exponentially, but it also

became extremely diverse. The majority of people in the metropolitan city are Caucasian (33.3%),

followed by Hispanic (28.6%) and Black/African American (22.8%) (NYC Ethnicity Composition

2010). The meddling of cultures and ethnicities gave the city’s population a unique multicultural

character, which still exists today. The population of New York City has currently reached an

outstanding 8,491,079 people as of July 2014, making it the largest city in America and the second

largest city in the world, after Tokyo, Japan (Change in Population 2014). Consequently, the

metropolis is extremely congested, which has caused rent to increase astronomically. According to

Porter et al. (2011, p. 14), Manhattan has the highest commercial occupancy rate in the U.S. at 96%.

The real median household income in New York is $53,843, which actually surpasses the

U.S.’s by $1,904 (FRED Median Income 2013). However, it is important to note that income

inequality within New York City is considerable. While New York County’s per capita personal

income is high at $121,623, per capita personal income in the Bronx is $32,852 (FRED Per Capita

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Income 2015). As a result, the state’s real median household income barely represents the reality of

the per capita income in New York.

Economic History

Since the 17th century, the harbor of New York City had been of particular economic

importance because it was one of the few on the Northeast coast that was deep and ice-free (Porter

et al., 2011, p. 4). As a result, the port served as the main international trading hub between the

USA and Europe. Ships would sail to the states in the south where they would collect goods such as

sugar, rum, tobacco and molasses, travel to Europe where they would sell the goods, and sail back

to New York City carrying money or European products, such as textiles (Porter et al., 2011, p. 4).

As expected, it became one of the busiest ports in America, and therefore undoubtedly contributed

to New York City’s rapid economic growth and development.

Besides textiles, ships that would sail back to New York City from Europe would also bring

books, especially British (Porter et al., 2011, p. 5). This led to the formation of a publishing cluster

in the early 1800s, which grew rapidly as book sellers would travel to the city from all over the

country to participate in book fairs (Porter et al., 2011, p. 5). Consequently, the publishing cluster’s

rapid development led to the formation of New York’s news cluster, and the foundation of The New

York Times in 1851 (Porter et al., 2011, p. 5). Combined with growing commerce and trade, New

York City began to form a flourishing financial services sector around Wall Street (Porter et al.,

2011, p. 5).

Beginning in 1960, New York’s employment in the manufacturing section fell from one million

to approximately 172,000 people in 2000 (Porter et al., 2011, p. 7). This period of labor transition

can be attributed to the fact that the state began to put more emphasis on white-collar jobs, instead

of blue-collar. Rudolph Giuliani’s inauguration in 1993 as New York City’s mayor is an important

landmark for the city’s financial sector. Under his administration, the New York City government

cut a variety of corporate taxes, in order to provide financial firms with tax incentives to remain in

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the metropolis (Porter et al., 2011, p. 9). As a result of the tax cuts, hundreds of millions of dollars

were awarded to financial firms in city tax holidays, in exchange for promises that they would

expand employment (Porter et al., 2011, p. 9). Bloomberg recognized Giuliani’s effort to keep

financial firms within New York City. When he became mayor, Bloomberg continued in the same

direction as he would constantly meet with corporate leaders to understand their needs, and thus

tailor the city accordingly (Porter et al., 2011, p. 10).

II. Economic Performance

U.S. Macroeconomic Outlook

Economic Profile

Accounting for PPP, the U.S.’s rGDP is currently the 3rd highest in the world at 2.4% (CIA

World Factbook 2014), while its rGDP per capita has reached a domestic record high at $50,857

(FRED Per Capita Income 2015). Services account for 77.7%, while industry and agriculture

account for 20.7% and 1.6%, respectively (CIA World Factbook 2014). The U.S.’s GDP is

composed out of the following: consumption (68.7%), government expenditure (18.1%), investment

(16.3%), and net exports (-3%) (CIA World Factbook 2014). The USA has the 5th highest Human

Development Index in the world at 0.914 (UN HDI 2013). In February 2015, consumer confidence

reached its highest normalized level since the global financial crisis, at 101.27928 (FRED

Consumer Confidence 2015). Despite extremely low interest rates, the personal saving rate stands

high at 4.6%, thus slowing down economic growth (FRED Personal Saving Rate 2015). This can be

attributed to the sizable decline of gasoline prices, but mainly to the fact that consumers are more

cautious post-crisis. As far as investment is concerned, both inward and outward FDI have

increased from $2.946 trillion and $4.862 trillion, to $3.258 trillion and $5.266 trillion, respectively

(CIA World Factbook 2014).

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Current Issues

While the U.S. has been out of the Great Recession since June 2009, it continues to face

significant challenges in its economy. Exhibit 1 shows that in the aftermath of the global financial

crisis in 2007, the government imposed an expansionary monetary policy in order to stimulate the

economy. The Federal Reserve immediately took measures to encourage consumption spending by

decreasing the federal funds rate to a minimum. When the conventional methods of monetary policy

failed to spark consumption, the Federal Reserve adopted the unorthodox method known as

quantitative easing (QE). As a result, the government has bought $3.5 trillion worth of assets from

financial institutions (The Fed Eases Off 2015), which have provided financial firms with vast

capital while decreasing the interest rates below 0.1%, and increasing money supply.

Exhibit 1: Federal Funds Rate

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The prevailing question now is whether its time to lift off the federal funds rate, provided that

the economy is strong and stabile enough to handle it. The Federal Reserve’s main withholding

concerns are the decrease of American exports triggered by China’s currency devaluation, and an

unstable labor market that is sending mixed signals. On the one hand, unemployment rate has been

reduced to 5.1% (FRED Unemployment Rate 2015) and is now closer than ever to its pre-crisis

level. On the other hand, labor force participation has decreased to 62.6%, the lowest since 1977

(US Jobs Report 2015). The problem is that the Federal Reserve’s indecision is creating uncertainty

in the markets, thus reducing their performance, as well as the investors’ confidence.

III. Regional Competitiveness

New York City is the most competitive city in the world (The Economist 2012). Not only does

it have a substantial diversity of top ranked clusters in multiple industries, but most important of all,

it has a job market that is driven by intellectual capital (The Economist 2012). The city is

tremendously urbanized, which facilitates intellectual spillovers and therefore allows ideas to flow

swiftly within the region (Ellison, Glaeser & Kerr 2007, p. 16). Furthermore, its infrastructure is

outstanding, which allows people to mobilize cost-effectively. However, there are also many

disadvantages that come with urbanization, which will be examined in the city’s diamond

framework.

New York City Diamond

Demand Conditions

New York City’s demand conditions are very favorable. The extensive diversity of products

that the city offers means that there is also a diverse base of customers, ranging from every day

consumers to businesses and governments all over the globe. The city’s port facing the Atlantic

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Ocean and multiple airports also make it convenient for the businesses to deliver their products in

an effective manner. Furthermore, the average household income of its residents is higher than the

national average, which means that they possess greater purchasing power. On the other hand, as it

was mentioned earlier in the demographics section, the inequality gap within the city is very broad,

which means that the level of consumption differs in every county.

Exhibit 2: New York City Diamond

Factor Conditions

The metropolis has accumulated both positive and negative factor conditions over the years.

One of its most important positive factors is the city’s infrastructure that facilitates mobility both

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regionally and internationally. Besides the city’s port that has already been examined, the George

Washington Bridge is the first significant infrastructure project that New York undertook along with

New Jersey. The double-decked suspension bridge begins in Manhattan, New York and ends up in

Fort Lee, New Jersey, thus enabling both states’ residents to travel with their mobile vehicles. New

York City also has three major airports: LaGuardia Airport, John F. Kennedy International Airport,

and Newark Liberty International Airport. As far as local infrastructure is concerned, the city has

one of the largest subway systems in the world. The underground system stretches as far as New

Jersey and Chicago, and serves over 4.5 million passengers daily, while operating 24 hours a day, 7

days a week (New York City Subway n.d.).

Human resources are a critical factor for the city’s economy. As mentioned before, the city’s

labor market is driven by intellectual capital, which means that its workforce is highly educated.

Businesses that are located in the area attract talent not only from other states, but from all over the

world. Furthermore, New York City has top ranked higher educational institutions such as NYU

and Columbia University, dating back to 1831 and 1754, respectively.

Urbanization in New York City is a crucial factor with many positive and negative

externalities. One of the factor’s major benefits is the close proximity to other people. The fact that

there are more people living and working per square mile means that it is easier to physically

interact with each other. Furthermore, it saves businesses transport costs by proximity to their

industry suppliers and final consumers (Ellison, Glaeser & Kerr 2007, p. 14). Another benefit of

urbanization, and therefore industry agglomeration, is labor-market pooling. Workers in an

urbanized city are able to match better across firms and industries by providing a wider range of

alternatives (Ellison, Glaeser & Kerr 2007, p. 15). Furthermore, new start-ups that locate near old

firms can hire away their workers (Ellison, Glaeser & Kerr 2007, p. 15). Last but not least,

industrial agglomeration can heavily enhance competitiveness and economic development by

facilitating intellectual spillovers, meaning that ideas flow fasters in an area where firms co-locate

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(Ellison, Glaeser & Kerr 2007, p. 16). Both the firms’ workers and their leaders can learn from each

other when they operate in the same area (Ellison, Glaeser & Kerr 2007, p. 16).

On the other hand, urbanization and industrial agglomeration have numerous negative

externalities, which mainly include density, congestion, and pollution. Density and congestion are

perhaps two of the biggest and consistent problems that New York City has been facing for many

years. As the city’s population grows, rent becomes increasingly unaffordable. This does not only

affect living costs, but also business costs. Renting commercial space is becoming more expensive,

and as a result firms and corporations decide to move their main operations to cities where it’s

cheaper to conduct business. This is becoming a huge problem, especially within financial firms, as

they move away from Wall Street to cities like Richmond, San Antonio, Nashville, etc. Just in

Arizona, financial employment expanded by 12.3% in 2008, and 7.2% in 2013 (Cities Stealing Jobs

from Wall Street 2014). Why should a midlevel salesperson occupy expensive Manhattan office

space when he could function just as effectively from much cheaper space in Phoenix or Saint

Louis? (Cities Stealing Jobs from Wall Street 2014)

Last but not least, pollution is also a problem born by urbanization in every major city,

including New York. There are so many people living in the city that sewage overflows are not rare

occurrences (Pollution in NYC n.d.). Furthermore, air pollution is also significant in the metropolis,

which is caused by sunlight interacting with vapors released from cars, motorcycles, factories, and

fuel-burning sources (Pollution in NYC n.d.).

Firm Strategy & Rivalry

A business in New York City, and therefore in the USA, has both advantages and

disadvantages in terms of the political, legal, and corporate environment that it operates in. Political

stability in the U.S. is an advantage for both its citizens, as well as for its corporations. The two-

party system rules out extreme political ideologies such as Communism and Fascism, both of which

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are becoming more prevalent in Europe each day, especially in countries that suffer economically.

According to the Institute of Economics & Peace, political instability in the U.S. ranks 1.0/5.0 (US

Peace Index 2015). As far as the legal environment is concerned, the government possesses many

legal and regulatory agencies to ensure that its citizens and businesses are operating within the

boundaries of the law. This is both an advantage and a disadvantage, since the system can be

perceived as naïve and perplexed, and it will be examined further in detail while analyzing the

financial services cluster. However, it has to be noted that the U.S. intellectual and property rights

are known to be rigid, which allows businesses and individuals to innovate with no concern that

someone else will take credit for their work.

Business costs and expenses in New York and the U.S. are also matters worthy of discussion,

specifically labor costs and corporate taxation. The main disadvantage of high labor costs is the fact

that manufacturing companies will choose to establish their factories abroad, particularly in

countries located in Asia. This is indeed a loss of opportunity for American blue-collar workers.

However, at the same time the high labor costs reflect higher wages and therefore a higher than

average quality of life. As far as white-collar workers are concerned, their high-wages reflect the

high profits of the companies that they work for, which does not constitute as an issue. Last but not

least, corporate taxation has become a major concern for businesses that operate within the U.S.

According to (Corporate Income Tax Rates 2014), the U.S. has the third highest general marginal

corporate income tax rates in the world at 39.1%. This forces major high-profit corporation to stash

away their taxes overseas. Companies such as Microsoft, Apple and Google, along with five other

tech firms, account for more than a fifth of the $2.10 trillion profits that U.S. companies are keeping

overseas (Corporate Income Tax Rates 2014). This is a major loss to government revenue, and

therefore society.

From a rivalry point of view, it has already been mentioned that New York City is the most

competitive city in the country, and the second most competitive city in the world after Tokyo,

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Japan. In any cluster within the New York City, firms compete with each other on a daily basis in

an attempt to capture a bigger market share than their rivals. Naturally, this forces the corporations

to substantially develop the products and services that they offer in order to keep up with the

competition. This is a major advantage for society as they get to enjoy high quality products at a

low, and competitive price.

Exhibit 3: New York Metropolitan Area Clusters

Source: US Cluster Mapping, 2013

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Related and Supporting Industries

As briefly mentioned before, New York City has a substantial amount of diverse clusters. This

may very well be attributed to the city’s ethnically diverse population dating back as far as the 19th

century when the first waves of immigrants began to arrive. The fact that people settled in the city

from all over the world has given the metropolis’ businesses an unprecedented open-mindedness,

which gives them the ability to innovate and thrive in numerous industries. As it is seen on Exhibit

2, the New York metropolitan area has 14 clusters that are ranked No. 1 in employment, ranging

from business services to jewelry and precious metals (New York Metropolitan Area Clusters

2013). As a result, clusters in the area can interrelate and interact with each other according to their

interests and needs.

A critical cluster that seems to be weak in the metropolitan area is in Information Technology

(IT). This can be traced back to the preference of New York City’s universities’ graduates, who

seem to be avoiding the tech industry. Only 6% of NYU grads chose to work in the IT industry in

2014, and 13% of Columbia, which uses a broad definition (New York MBAs 2015). However,

Cornell University has been constructing a brand new Cornell Tech campus in Manhattan’s Chelsea

neighborhood, in cooperation with the Israel Institute of Technology (Cornell IT Campus n.d.). Due

to both schools’ excellent reputation, the brand new campus will attract IT talent and therefore

develop the IT cluster significantly.

IV. New York City Financial Services Cluster Analysis

Overview

When it comes to financial services in the U.S., New York City is the first city that comes to

mind. The financial services cluster has been developing since the 19th century, and as a result it has

built a withstanding reputation. The biggest financial firms in the world are located on Wall Street,

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which means that the city attracts the top international talent in finance. The financial services

sector has been extremely profitable for the firms, as well as for the government in the form of tax

revenues. However, the same firms have also been the source of major economic calamities, such as

the unprecedented global financial crisis. This paper examines how the New York Financial

Services cluster is constructed, why it is important for both the city and the country, and how it can

be prevented from causing another major economic disaster.

U.S. Financial Services History

The New York Stock Exchange and Board was the first stock exchange in the U.S., founded in

1817 (Geisst 2012, p. 14). During the 19th century, traders would mostly buy and sell bonds and

railroad shares, which would stoke up the market (Wall Street 2008). In the beginning of the 20th

century, Wall Street had already begun accumulating enormous wealth, which was used to facilitate

industrial concentration under the command of small corporations (Wall Street 2008). In the 1920s,

Wall Street’s wealth grew even more, and would see to the promotion of large corporations with an

immense concentration of capital (Wall Street 2008). However, the foundation of the financial

claims at the time was quite frail, which caused the stock market crash on October 24, 1929 (Wall

Street 2008). The crash triggered a wave of financial regulatory legislation, as well as the

foundation of the Securities and Exchange Commission in 1934 (Wall Street 2008). The most

notable imposed financial reform would be the Glass-Steagall Act in 1933. The act specifically put

limits on the interest rates that financial institutions could put on deposits, established the Federal

Deposit Insurance Corporation, and prohibited banks from engaging in non-banking activities, such

as trading securities (Sherman 2009, p. 4). The period between 1933 and 1978 marked a safe

economic course where banks were limited as to the amount of risk they could take. The first act of

deregulation came with the Supreme Court’s decision in “Marquette National Bank v. First of

Omaha Service Corp.” in 1978. “The Court ruled that the bank’s home state law applied, allowing

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national banks to effectively export the maximum interest rate regulations from one state to their

operations nationwide” (Sherman 2009, p. 5). Following a series of heavy deregulation under the

Reagan administration, the Glass-Steagall Act was repealed, while being succeeded by the Gramm-

Leach-Bliley Act in 1999, which allowed any combination of banking, insurance operations and

securities (Sherman 2009, p. 10). Repealing the Glass-Steagall Act indicated the beginning of an era

of immense profits for financial institutions for 8 years, until the global financial crisis took place.

Mapping the Cluster

Related and Supporting Industries

Financial Firms: The New York metropolitan area financial services cluster is the largest in

the country, since it includes 17,589 establishments (NY Metropolitan Area FS Cluster 2013).

Exhibit 4: Major Financial Firms

Firm Profits (in millions)

Wells Fargo $21,878

JP Morgan $17,923

Citigroup $13,673

Bank of America $11,431

Goldman Sachs $8,040

Morgan Stanley $2,932

Source: Fortune 500 List, 2014

The financial establishments with the largest profits are listed in Exhibit 4. There are 17,583

more firms that operate within the New York metropolitan area of course, but the institutions above

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capture the largest market share. As it can be expected, the competition among the corporations is

remarkably high, thus making it difficult for start-ups to ever reach the profit level of the above

companies.

Insurance: There are 2,636 insurance establishments in the New York metropolitan area,

employing more than 130,304 people (NY Metropolitan Area FS Cluster 2013). Top insurance

companies include AIG, MBIA and AMBAC. Following deregulation, the Leach-Bliley Act in

1999 allowed financial institutions to heavily interact with insurance companies. Specifically,

investors would insure collateral debt obligations (CDOs) by paying a premium, so that if the

mortgages went bad, insurance companies would cover their loses (Inside Job 2010). Furthermore,

speculators could also insure the same CDOs, so that if they turned out to be defective, they would

get covered for their loses as well (Inside Job 2010). This resulted in the meltdown of AIG, which

prompted the government to step in. Insurance companies still conduct business with financial

institutions, and they exchange services on a daily basis.

Mortgage Lenders: Mortgage lenders are an important part of the financial services cluster. Whether

they are located in New York City or not, they interact with financial institutions every single day. Fannie

Mae and Freddie Mac are crucial in their role in the mortgage industry. “Fannie Mae and Freddie Mac

buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into

mortgage-backed securities (MBS) that may be sold” (Federal Housing Finance Agency 2015). As a

result, financial firms trade MBS with mortgage lenders and investors on a daily basis.

Rating Agencies: Rating agencies have a huge influence in the fixed-income security markets.

Issuers of bonds have to pay rating agencies, in order to get their financial product graded as to how likely

they are to pay back their debt. As a result, the rating agencies make profit from corporations and

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governments by rating their bonds. The biggest rating agencies are Standard and Poor’s, Moody’s and

Fitch Ratings, all of which are located in New York City.

Business Services: The New York metropolitan area also has the largest business services cluster in

the U.S., having 43,542 establishments, and employing more than 736,736 people (NYC Business

Services Cluster 2013). Business services include consulting, business support, computer services,

employment placements services, etc. (NYC Business Services Cluster 2013). Naturally, financial

companies are in need of such services, and as a result both clusters have grown tremendously in the

metropolitan area.

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Exhibit 5: Cluster Related and Supporting Industries Map

Real Estate, Construction and Development: Local real estate, construction and development in

the New York metropolitan area is also the largest local cluster in the country, with 94,462 establishments

employing over 547,057 people (NY Metropolitan Real Estate 2013). This does not come as a surprise,

since these are the very establishments that are responsible for building the immense skyscrapers of New

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York City, and making it look like what it is today. Besides having built the financial corporations’

headquarters, these two industries interact on a daily basis, either directly or indirectly. When a piece of

property foreclosures, the land is repossessed by its lender, which is usually a financial institution. At that

point, the foreclosed property becomes an asset to the bank, called Real Estate Owned (ROE n.d.).

Financial institutions try and sell foreclosed property to real estate investors since they are not in the

business of buying and possessing real estate (ROE n.d.).

Accounting Firms: Accounting firms provide audit services to both banks and mortgage lenders.

Under (NY Business Services Cluster 2013), they fall into the business services category. However, their

role in the financial services cluster is particularly important The accounting firms’ services can be hired

by banks and mortgage lenders, in order to evaluate the financial health and sustainability of their

institution.

Firm Strategy and Rivalry

Deregulation: The Gramm-Leach-Bliley Act was the epitome of deregulation, which was achieved

by financial corporations through spending tremendous amounts of money in lobbying efforts (Sherman

2009, p. 10). By repealing the Glass-Steagall Act, banking, insurance and securities operations could take

place under the same roof of a corporation, which made it extremely complicated for regulators to keep

up with (Sherman 2009, p. 10). At the same time, unregulated financial derivatives trading began growing

rapidly in the market, such as credit default swaps (Sherman 2009, p. 10). Since financial derivatives were

a recent innovation, there were no limits as to the risk or amount of trading allowed, and their value

inflated immensely from $106 trillion in 2001, to $531 trillion in 2008 (Sherman 2009, p. 11). To make

matters worse, the SEC essentially stopped investigating and supervising financial firms, as the

corporations could voluntarily submit a report of their assets and activities whenever they wanted

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(Sherman 2009, p. 11). It was only a matter of time before the whole system collapsed, as it naturally did

in 2008.

Financial Regulatory Agencies: The U.S. Financial Regulatory System is composed out of six

agencies, which are listed on Exhibit 6 below.

Exhibit 6: Financial Regulatory Agencies

Agency Function

Federal Reserve System The Fed has three primary functions: Regulating the U.S. monetary system through controlling

money supply and the federal funds rate. Monitoring the operations of financial companies. Promoting stable prices and economic growth.

U.S. Department of the Treasury The Treasury Department has four main functions: Recommending and influencing fiscal policy. Regulating U.S. imports and exports. Collecting all U.S. government revenues. Designing and minting all U.S. currency.

Securities and Exchange

Commission

The SEC is an independent regulatory agency, and is responsive for overseeing:

U.S. securities markets. Enforcing securities laws. Monitoring exchanges for options, stocks, and other securities.

Furthermore, the SEC is accountable for regulating credit rating agencies, and can bring civil lawsuit charges to individuals, which can end up in the Justice Department for prosecution.

Federal Deposit Insurance

Corporation

The FDIC’s primary function is to insure and guarantee individual savings bank deposits, in case a financial institution collapses or goes bankrupt. However, banks must meet certain reserves and liquidity requirements to qualify for FDIC insurance. If not met, the FDIC has the authority to fire the bank’s senior management and impose necessary corrective measures.

Commodities Futures Trading

Commission

The CFTC is primarily responsible for: Providing a regulatory framework for the futures contracts

market (i.e. derivatives). Regulating the derivatives clearinghouses Approving and regulating organizations responsible for

executing future trades. Monitor buyers and sellers to prevent fraud.

National Credit Union “The NCUA is responsible for chartering and supervising U.S. credit

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Administration unions. It also insures savings in all federal- and most state-chartered unions through a fund called the National Credit Union Share Insurance Fund.”

Source of Content: Council on Foreign Relations, “The U.S. Financial Regulatory System”, 2008

Looking at Exhibit 6, one can imagine that with so many regulatory agencies, it would be

almost impossible for a global financial crisis to take place. In theory, if every regulatory

agency enforced its authority in a correct manner, the financial crisis would not have taken

place, simply because financial institutions would have been restricted from becoming

involved with high-risk transactions, such predatory lending and overleveraging. However,

politicians and lobbyists have huge influence on all of the above regulatory agencies, which

deems them inefficient to say the least.

Supporting and collaborating local government: New York City is committed in

creating a suitable and efficient corporate climate for financial institutions. The financial

services industry provides more than 9% of the city’s total jobs, as well as an extensive 34%

of its private sector payroll (NYC Economic Development Corporation 2009). As a result,

New York City has an active interest to keep the financial services cluster profitable, as well

as intact. Starting with Giuliani, every single mayor of New York City has been meeting in

person with financial corporate leaders, to discuss how the city can be tailored to their needs.

Rivalry: New York City financial services institutions are among the most competitive

firms in the world. They compete on a daily basis over recruiting the most excellent financial

talent, signing the wealthiest clients and providing the best products and services. From a

rational perspective, this high level of competition provides top quality products and services

at a low price.

Exhibit 7: New York Financial Services Cluster Map

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New York Financial Services Cluster

Factor Input

International talent: The Wall Street firms attract the best financial minds in the world.

Since they have an outstanding reputation with huge financial rewards, every graduate’s

dream that wants to pursue a career in finance wants to work in Wall Street. This gives a huge

competitive advantage to New York City in relation with other financial services clusters in

the U.S. and the rest of the world.

Prestigious business schools: The NYU Stern School of Business, and the Columbia

Business School are the best in the state, and the country. Graduates of these educational

institutions supply the labor pool market with skills necessary to work in the financial services

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industry. As a result, Wall Street firms tend to heavily recruit graduate students from these

business schools within New York City’s cluster.

Urbanization: The same positive and negative externalities that were listed for New

York City can also be applied for the financial services cluster. Financial corporations benefit

from the industrial agglomeration benefits, such as close proximity and labor-market pooling,

but suffer from soaring rent, congestion and pollution.

Demand Conditions

The demand conditions for the New York City financial services cluster are superb, since

there is always demand for the products and services they offer, which include loans,

mortgages, IPOs, mergers and acquisitions, bonds, stocks, etc. Due to the firms’ excellent

reputation and wide range of services that they offer, demand is both domestic, and

international. The Wall Street firms have headquarters all over the globe, which means that

they have a significant global market share of the financial services industry.

A very important demand condition is the fact that their customer base is composed out

of wealthy individuals, as well as governments. The financial institutions trade corporate

and government bonds with treasuries in every state in America, and they also provide their

services by dealing with pension funds and other assets. As a result, demand never runs short

for financial institutions, it’s only a matter of what firm satisfies it.

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Exhibit 8: New York City Financial Services Diamond

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New York Financial Services Cluster

Policy Recommendations

The main policy recommendation that has been deducted from the research and analysis

of the New York Financial Services Cluster, as well as the U.S. Financial Services Industry as

a whole, is to re-establish regulation. Monstrous profits cannot exist without monstrous costs,

and if proper and efficient regulation does not get enacted once again, there is another global

financial crisis ahead. The U.S. government and its financial industry need to learn from their

mistakes, and promote stable and safe growth for once more. This is only going to be

achieved if financial regulatory agencies impose their authority and act in an unbiased manner

that is beneficial to the economy, not just the richest 1%.

As far as New York City is more specifically concerned, it faces many problems that are

negative externalities of urbanization. Rent is only increasing, as well as congestion. Both

externalities are discouraging financial firms, who end up moving their operations to cost-

efficient cities. The New York City government has to provide incentives, in order to keep the

financial institutions within the city. Losing major financial institutions will strike a blow to

New York City’s economy, since the financial services industry generates 34% of the city’s

payroll.

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IV. Conclusion

This paper has analyzed and examined the New York City Financial Services Cluster.

Research has shown that although it is still the top financial services cluster in the world, it is

threatened by high corporate marginal taxation, city-wide soaring rent, and an unregulated

corporate environment. The latter is especially important since it puts the firms’ long

withstanding prestigious reputation in jeopardy, which can impair trust. When there’s no trust,

there’s no confidence, which leads to less investment and less demand for the firms’ products

and services.

In conclusion, the U.S. government and the financial services industry need to take

necessary steps to slowly transition their high-risk strategy, to average-risk and stable growth.

Effectively enforcing financial regulation will be the biggest, and best step that the

government will make. The New York Financial Services cluster will always be there, but the

question is, will it remain at the top?

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