What Is a Financial Hub?

A financial hub, also known as a financial center by the International Monetary Fund (IMF), is a city or region where a large number and a 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 importance to their respective economies and are thus called financial hubs.

Key Takeaways

  • A financial hub is a city or region that contains a large number of varied financial services institutions.
  • The term "financial hub" derives from the hub and spoke structure, signifying that a financial hub is important to a region's economy.
  • Some of the most well-known financial hubs are New York City, London, Tokyo, Paris, Frankfurt, and Hong Kong.
  • Cities benefit from being financial hubs due to the tax revenue earned from the corporations that set up shop there.
  • Because financial hubs attract financial companies and their workers, they also lead to a rise in other businesses, such as restaurants, entertainment centers, and gyms.
  • Financial hubs often see a rise in rent and other costs due to the influx of companies and workers, which can result in gentrification that pushes out poorer residents.

Understanding a Financial Hub

There are financial hubs in most countries in the world. For example, Paris is the financial hub of France, as most major French financial institutions and France's largest stock exchange, Euronext Paris, are headquartered there.

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. 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.

Because financial hubs contain businesses that attract a lot of workers, many other businesses rise up to cater to all the individuals in the area, creating a bustling city or region. Other businesses can range from restaurants to gyms to department stores to various entertainment centers.

Why Financial Hubs Exist

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, consolidating firms in one area benefits firms within an industry to co-locate in a certain city because it is easier to hire capable workers where industries are concentrated.

For example, it would be easier for one worker to quit their job in one firm to go work at another firm if they didn't have to make a big move to do so.

London’s position as Europe's financial hub has been scrutinized following Britain’s exit from the European Union (EU).

In addition, there are also benefits to innovation as creative people are able to meet and discuss issues across firms. As a result, these interactions can lead to more innovation. Furthermore, many meetings are necessary for these industries and if all participants work in the same city, it is easier to get together.

Financial hubs are located in areas where firms have access to large amounts of capital or funding from banks, insurance companies, and other financial institutions. Located in hubs are financial services companies that offer a plethora of services concerning mergers and acquisitions, initial public offerings (IPOs), and trading.