Foreign banks' attraction to the financial centre Frankfurt--an inverted 'U'-shaped relationship

Abstract

This article traces the location of foreign banks in Germany from 1949 to 2006. As suggested by New Economic Geography models, we find an inverted 'U'-shaped concentration of foreign banks in Germany. Only after a competition between several cities, Frankfurt has emerged as the pre-eminent financial centre, triggered by the 'historical event' of setting up the German central bank in Frankfurt. After a strong increase, Frankfurt's share in the location of foreign banks in Germany decreases slowly but significantly since the mid-1980s. We conclude that there will be a lesser role in Europe for second-tier financial centres in the future.