BANKERS in the City of London are starting to think what until recently would have been unthinkable — that London could soon eclipse even New York as the world’s pre-eminent capital markets centre.

Twenty years to the day since the Big Bang reforms that helped to spark a renaissance for London as a financial centre, bankers are more confident than ever that the capital can make further progress in capturing market share from other centres.

London has the critical mass, the language, the time-zone advantage, the legal structures, the political stability — not to mention the fleshpots — to attract the world’s wealthy and their advisers. Even City regulation, once seen as deterring financial services firms from basing themselves in the UK, is now regarded more favourably.

Significantly, London is also starting to pioneer new financial structures and ideas where once it would have been a follower. Jeremy Sillem, a senior banker who worked for Lazard for many years in both New York and London, detects a major shift in attitude in London. “Fifteen years ago it was so much more risk-averse. Today there’s a sense of optimism and a willingness to have a go.”

Mr Sillem, who now heads Spencer House Partners, a boutique investment bank financed by Lord Rothschild and Sir Ronald Cohen, points to the new $5 billion (£2.7 billion) permanent capital vehicle set up by Kohlberg Kravis Roberts and floated on Euronext, and to the leading role played by London in floating funds of hedge funds, a trend yet to catch on in the US. Spencer House is currently bringing a specialist credit fund manager, BlueBay, to a full London listing.

Mr Sillem is not alone in sensing a new confidence. Last month at the Mansion House, the Lord Mayor of London, David Brewer, pointed out that the capital had trounced New York in attracting new flotations by foreign companies.

Whereas the New York and Nasdaq exchanges had played host to 17 international IPOs worth $6 billion this year, London had attracted 59, worth $16 billion. “The non-adversarial way we do regulation is widely regarded as one of the key reasons for London’s continued growth,” Mr Brewer said.

Sarbanes-Oxley, the new rules on companies listed in the United States that followed the Enron scandal, are seen as a godsend to London, shifting business back across the Atlantic and denting America’s image as the light-touch home to unfettered global capitalism.

Sir Win Bischoff, a highly regarded elder statesman for the City, also raised eyebrows this month when he suggested that London could overtake New York. He is, after all, European chairman of America’s biggest bank, Citigroup. “If we continue to embrace change, innovate and above all welcome the best talent from all over the globe, I can see a time not so far ahead when London may well eclipse New York as the pre-eminent financial centre,” the former Schroders chief said.

In some ways, London is already ahead, beating New York in capturing international market share, though America’s vast domestic market pushes it into pole position on total financial services activity.

Of 16 categories defined by International Financial Services London, the City’s promotional body, Europe already leads the US, or is catching up, in 12. It enjoys the biggest leads in cross-border bank lending, marine insurance, over-the-counter derivatives and commercial banking. The US has the biggest lead in securitisation, hedge funds, equities and core investment banking.

Hedge funds are a good example, however, of where London appears to be catching up. Ed Balls, the minister responsible for the City, claims that hedge fund assets managed from Britain are growing faster than those managed in the US.

The Financial Services Authority’s growing interest in monitoring London-based hedge fund managers (though not their offshore hedge funds) is coming to be seen as a plus for the industry. Hedge fund investors are increasingly pension funds, not rich individuals, and they like the reassurance that the managers of their money are authorised by the FSA.

But there are worries, too, that London’s new competitive edge could be blunted and that the Americans will fight back harder if they see serious amounts of business decamping to London. Doug McWilliams, head of the Centre for Economic and Business Research, said of Sarbanes-Oxley: “I can’t believe the Americans will keep things like this. They’ll realise they’ve shot themselves in the foot.”

There are other issues for London, primarily tax and infrastructure. Fund managers may still be flocking to the capital, but they are domiciling their funds in more tax-friendly jurisdictions such as Ireland and Luxembourg. Dublin’s 12.5 per cent profits tax compares favourably with the effective 29 per cent paid on profits here.

Hedge fund managers claim they are being unfairly targeted. A special unit of HM Revenue & Customs has been set up to look into the personal tax affairs of hedge fund plutocrats, and there is talk among them of decamping to friendlier tax regimes such as Switzerland.

Transport is a problem. It can be a long haul from Mayfair, Kensington, Notting Hill and points West, where the most powerful investment bankers live, to the City and Canary Wharf, where they toil.

Gordon Brown’s wooing of City leaders last week and a similar campaign by David Cameron suggest that politicians are at least paying lip service to the financial services industry, though some in the City regard it all as a bit of a PR stunt.

The City’s hopes of giving Wall Street a seriously bloody nose remain in the balance. “It’s very much all to play for, says Mr McWilliams. “It’s not impossible.”

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