Of course, this must not be overplayed: London's advantages of liberal regulations and a critical mass of services, capital and knowhow are sizeable carrots. But times are changing. Deregulation is spreading Europe-wide. Frankfurt and Paris have already beaten London in setting up an electronics settlements system, while the fully automated Frankfurt Terminborse (futures and options) is vying with the open outcry LIFFE market in London. Rajan also points out that French banks are now investing 9% of their budgets on staff training, the Germans 7% and the British only 2%. "The City needs to double its efforts," he states bleakly.
And not to be forgotten is the sheer weight of the German economy. As the engine on the European train, its power to direct money flow is considerable. And so far its major banks have sworn faithfulness to Frankfurt. LIFFE chief executive Michael Jenkins warns that in his view the Government's attitude to Europe is critical: "If we sit on the outside then it will be difficult for London to retain its position."
The pain which the City is now feeling is too easily brushed off as a short-term punch in the stomach from the economy. Yes, share market volumes have halved and mergers and acquisitions fees have quartered in the past year. Says Hoare Govett chief executive Peter Voss: "From 1988 to 1990 there were very few firms that traded profitably and no firm made an adequate return on its capital."
These symptoms are indeed merely cyclical ones, but the talk is that a more serious illness may be edging in. In Wall Street journals now speak of an irreversible decline of the middleman - the suave deal maker who carves a chunk out of the real workers' profits by flitting with bright notions from door to door. International Business Week suggests that several trends are alienating the broker and merchant banker from their clients: moves towards in-house corporate financing and in-house research, index investing, global trading and automation. To what extent is this true in London?
Certainly it is in so far as more financial work is being brought in house. Hanson, British Petroleum, Guinness, Cable and Wireless, BTR and ICI handle a large part of their own M and A work, while several do their own forex trading and groundwork for bond issues. "It gives quite a clarity of management information if you do it yourself," says BP spokesman Ian Fowler.
The likelihood is that the trend will continue as more companies come of size to justify it, but as James Capel chief investment strategist Alastair Ross Goobey says: "I don't think you get any company that thinks they have the whole answer."
The same phenomenon is occurring with brokers' research. Research is spilling out of the broking houses by the shovelful, but often straight into the fund manager's bin. Prudential's equities director, Rodney Dennis, uses copious research but complains that it is often "more descriptive than analytical". Legal and General senior director Michael Payne adds that the merger of brokers and merchant banks (which have vested interests in some stocks) has created suspicion. "It's the recommendation that you can no longer trust."
As a result, more fund managers are employing their own in-house research teams and some their own traders in order to get an edge. The stress on quality is such that Prudential puts every broker, from Sydney to Milan, through a point by point assessment, and eliminates all but the best. The clear implication is a future world peopled by fewer brokers.
This is all the more true because of a trend towards bigger finance houses that are chewing into a shrinking cake. It is a little like the adage that it takes money to make money. Big market makers and brokers can give big investors the volumes and flexibility of trade that they need. And the more deals they get, the bigger they become.
Additionally, the practice of "soft broking" (giving kickbacks, eg. paying the cleaning bills) by those institutional investors that do trade through them is putting pressure on the less moneyed brokers. "A broking house might pay back £120 (in perks) for £100 they get in," complains one trader. He claims that it is a deliberate ploy to squeeze out weaker brokers.
However, these are only blips in the stream of things, as are the rise of index investing and the increased use of futures to rebalance portfolios (both of which slice back the brokers' business). There are weightier events to consider.