Still reeling from the trauma of 2008, the City of London, has been furiously defending its title as the world’s leading financial centre from sustained attacks from the media, politicians and regulators. But even as British bankers and traders wait nervously to see whether chunks of business will be hewn off in the regulatory carve-up currently being debated at national, European and global levels, there is a new fear that the trickle of financiers heading for the exit following the latest taxation round may turn into a flood.

Last year, the Labour government, after a decade-long laissez-faire attitude towards the City, with “light-touch” taxation and regulation, crashed the gears into reverse. Capital gains tax was raised, nondomiciles were hauled into the UK tax net, income tax increases for high earners were announced and, in December, a one-off 50% tax on all bonuses over £25,000 was imposed.

According to accountant KPMG, since the 50% tax rate on earnings exceeding £150,000 came into effect last month, senior bankers and hedge fund managers based in London are paying more in personal tax and social security than they would if based in New York, Paris, Frankfurt, Geneva, Zurich, Dubai or Hong Kong. An estimated 70% of Europe’s hedge fund industry resides in London, along with 80% of its private equity funds. KPMG ranked London as the most expensive financial centre by employee tax and social security for combined bonus and salary over £500,000. For someone earning a combined bonus and salary of £250,000, it has become third most expensive, after Frankfurt and Paris. Even without the bonus levy, London was already the second-most expensive city, behind Paris, to base an executive in terms of employer tax and social security payments.

Nor is this the only challenge for the City to contend with. Last November, France’s president, Nicolas Sarkozy, mischievously described the appointment of Frenchman Michel Barnier as the EU’s internal markets commissioner, as a victory over the “excesses of Anglo-Saxon financial capitalism”. While the UK chancellor, Alistair Darling, was quick to remind Sarkozy that it is also in the interest of Frankfurt and Paris to strengthen the European financial marketplace, his rebuke only highlighted London’s deeper concerns. “The real competition to Europe’s financial centres comes from outside our borders,” said Darling. “London is New York’s only rival as a truly global financial centre.”

Hardly helping matters is the European Parliament’s ongoing campaign for a global tax to discourage excessive risk-taking by banks and to ensure the industry pays for the recent crisis. The European Commission is developing plans for this tax in time for June’s G20 meeting, but with the EU acting alone if there is no global agreement.

So with tax rates in Europe being on a par with the UK and with concerns rising over the regulatory ambitions of the European Commission, it looks unlikely that financial services will be stampeding over to Paris or Frankfurt.

Besides, London still has much to offer as a European base, including a huge pool of technical and legal expertise, and an infrastructure and critical mass that give it a massive competitive advantage over other centres such as Zurich or Geneva. Mobile hedge and private equity funds can choose to operate under flags of convenience, and employees of large global financial institutions can choose to base themselves in Switzerland or New York, but there would need to be a permanent and major dislocation for banks and bankers to leave.

“Global financial centres are places with intense concentrations of financial professionals and their firms transacting international business,” says Michael Mainelli, executive chairman of the Z/Yen commercial think-tank, and Gresham Professor of Commerce. “International activity involves at least two locations in different jurisdictions. Global deals increase the number of involved parties, adding lawyers and analysts to a mix of syndicated finance.”

Nevertheless, fears about a regulatory backlash and new taxes are having an impact. In March, New York tied for the first time with London for first place in the latest Global Financial Centres Index (GFCI) compiled by Z/Yen for the City of London Corporation. London had been 16 points ahead but fell 15 points, while New York gained a point. Hong Kong and Singapore were third and fourth respectively, Zurich and Geneva were seventh and eighth, with Frankfurt 13th and Paris 20th. Eight centres are considered to be global leaders: London, New York, Hong Kong and Singapore, and Chicago, Zurich, Toronto and Frankfurt.

This shift is also reflected by changes in position in the five competitiveness sub-indices: people, business environment, market access, infrastructure and general competitiveness. London, which had led the field in all areas in previous surveys, was overtaken by New York in respect of people, business environment, and infrastructure. Hong Kong and Singapore remain third and fourth throughout, although Singapore moved ahead of Hong Kong into third in the “people” sub-index. Shanghai made impressive gains, climbing into the top 10 in all but one area (business environment).

Significantly, though, the latest rankings are based on surveys taken from July to December 2009, when the UK was awash with speculation about tougher regulation and punitive taxes. Since then, global banking regulators have made liquidity proposals along the lines of the UK rules, while US president Barack Obama has proposed a tax on bank balance sheets and new limits on proprietary trading.

Nevertheless, the ligaments of global economics are already straining. In the recent GFCI, Hong Kong was the favourite among insurance professionals – the first time a city other than New York or London topped a sector rating. The shift may already be having practical effects, with UK life assurer Prudential announcing in March that it would seek a Hong Kong listing. According to Goldman Sachs, the BRIC countries – Brazil, Russia, India and China – have accounted for 45% of all global growth since 2007 and are set to reach parity with the West in just 23 years if trends continue. And because this remarkable pace has not been matched by the development of their capital markets, the proceeds have largely been channelled through Western financial centres, soaking up treasury bonds, debt derivatives and seeking company flotations.

London, with its cultural, regulatory and geographic advantages over New York, has generally been the prime beneficiary. But as the financial infrastructures of these emerging economies develop and gain critical mass, business will inevitably gravitate to where capital sits, be it Hong Kong, São Paulo or Shanghai. Goldman Sachs estimates that the ratio of equity market capitalisation to GDP in the BRIC countries has jumped from about 20% a decade ago to nearer 70% now.

In 2009, Brazil was home to two of the world’s three largest IPOs. Spanish banking giant Grupo Santander raised $8bn from selling a 16% stake in Banco Santander Brasil in October, while, in June, credit-transaction processor VisaNet raised $4.3bn. And so far this year, IPOs in Hong Kong have outstripped London or New York in value terms, with $3.58bn in new listings. Although the largest potential IPO, the $15bn IPO of American International Assurance, AIG’s Asian unit, became a casualty of AIG’s decision to sell AIA to Prudential for $35.5bn, the Pru is now planning a Hong Kong listing to help it to raise the funds needed for the deal.

This does not mean that London and New York’s roles as global financial centres will come to an end. A large part of their business still emanates from Western markets and they still enjoy a formidable advantage in the debt and derivatives business. But perhaps their hegemony will be eroded and the existing concentrations in the capital markets, and hence banks and bankers, will, over time, become spread more evenly round the world.