What is a 'Financial Hub'

A financial hub is a city or region where a large number and variety of financial services institutions are headquartered. The term hub is a metaphor, comparing the financial services industry to a wheel with a hub and spokes. The hub is the center of the wheel, where the axle connects and the spokes converge, and therefore is of central importance to the mechanism. Cities or regions where an economy’s financial services are located are of similar to importance to their respective economies, and are therefore called financial hubs.

BREAKING DOWN 'Financial Hub'

There are financial hubs in nearly every country in the world. The financial hub of France, for instance is Paris, as most major French financial institutions are headquartered there, along with Euronext Paris, France’s largest stock exchange. But there are also international financial hubs that serve as the most important financial centers for regional economies as well. An example of such a financial hub is London, which serves as the financial hub for all of Europe, though London’s status as the European economy’s most important financial center has been called into question following Britain’s decision to exit from the European Union. Other financial hubs around the world include Singapore, Hong Kong, Tokyo and New York City.

There are many advantages that result from a city being a financial hub. Financial institutions like commercial banks, investment banks, securities exchanges, and investment advisories can be very profitable businesses, and a city stands to raise a lot of tax revenue when such firms are headquartered within their borders. Being a financial hub also means being a convenient location for holding business meetings and conventions, which in turn drives tourism and related tax revenues. At the same time, financial hubs like New York and London have also seen average rents skyrocket in recent years, as demand for housing outstrips new supply. This has caused some activists to question whether the benefits of being a financial hub outweigh the costs to poorer citizens. 

How Financial Hubs Form

Economists have attempted to explain the phenomenon of financial hubs, whereby financial services firms cluster together in certain cities, through what they call cluster theory. According to cluster theory, it benefits firms within an industry to co-locate in a certain city because it is easier to hire capable workers when industries are concentrated. In addition, there are also benefits to innovation, as creative people are able to meet and discuss issues across firms, and these interactions can lead to more innovation.
 

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