The New York City Financial Services Cluster - Research Paper

The New York City Financial Services Cluster
Darla Moore Schoolof Business
RegionalCluster Development and Competitiveness
Loucas Anagnostou
Loucas.Anagnostou@maec.moore.sc.edu
22 October 2015

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

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

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Exhibit 7: New York Financial Services Cluster Map
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

Loucas Anagnostou
23
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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24
Exhibit 8: New York City Financial Services Diamond

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25
PolicyRecommendations
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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26
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?

Loucas Anagnostou
27
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