By Julian Knight BBC News Online business reporter

What if the City of London, the beating heart of Europe's financial system, was the scene of a major terrorist incident on the scale of September 11?

Those charged with organising the City's defence make optimistic noises.

Put simply, if disaster were to strike, City trading should continue without interruption

Jamin Smith, London Stock Exchange

However, more than three out of ten financial firms have made no disaster plans, according to the City watchdog.

If a major incident were to occur, these firms could cease to exist, an expert warns.

The question of how London would cope has been occupying the minds of the government and the City since the attack on New York's twin towers.

The City has had to deal with terrorism before: bombs at the Baltic Exchange and Bishopsgate have rocked the square mile in the past.

How well prepared, though, is the City for a much larger cataclysm?

Worse case scenario

The Civil Contingency Committee, chaired by the Home Secretary, has been auditing disaster planning at all levels of local and national government in the aftermath of September 11.

And, according to the Corporation of London, the capital's emergency services and utilities have been regularly running through disaster scenarios.

"Every contingency plan has had to be measured against a new higher level of disaster. The worse case scenario is no longer a two thousand pound bomb going off," says Paul Eskritt, Corporation spokesman.

The Bank of England, the Treasury, and the City watchdog the Financial Services Authority (FSA), have been charged with the task of co-ordinating the plans of financial institutions.

Emergency HQ

Their emphasis has been on communication and IT back-up.
Authorities believe that proper planning will mean that financial transactions, from cash machines to the commodity and money markets will continue in the event of a disaster.

Stock exchange has plans in place

In August the FSA invited the BBC to see its new emergency HQ, based in a secret location.

The FSA "bunker" has room for up to 200 staff and is linked to the UK's biggest banks, the stock exchange and to central government.

Likewise, the London Stock Exchange (LSE) has a back-up office where all electronic trades can be routed through in case its Threadneedle Street HQ was knocked out.

It was only in the light of September 11 that the New York Stock Exchange (NYSE) opened an emergency HQ.

"Put simply, if disaster were to strike the City trading should continue without interruption," says LSE spokesperson Jamin Smith.

Big banks prepared

All in all, the FSA says that all 35 of the UK's largest banks and financial institutions have systems in place to keep their businesses running if they had to abandon their headquarters.

We are in a different world - planning has to take account of truly massive events

Paul Eskritt

Although the UK's largest banks remain silent about their disaster planning, HSBC confirmed to BBC News Online that it has back-up IT and communication systems - housed in a separate location - in case of an attack on its new 42-storey tower at Canary Wharf.

This is in stark contrast to a year ago, when many banks had their back-up IT and communication systems housed within their main headquarters.

This was a hangover from planning for the millennium bug, when location of back-up systems was less of an issue.

Loss of 'campus'

Now firms have to face up to the possibility that a disaster may mean the "loss of campus" as post-September 11 US disaster planners term it.

In response, according to Mr Eskritt, 'considerable' sums have been spent by City firms over the last year meeting the terror threat.

However, not all of the financial world is a picture of preparedness.

According to John Fryer, FSA spokesman, "30% to 40% of the 11,500 firms we regulate have no disaster plans or back-up systems in place."

A long way to go

Mr Eskritt worries that these unprepared firms would struggle to stay afloat in the aftermath of a major incident.

"A firm can survive without its headquarters but not without its databases. At the very least the smaller firms have got to look at IT back-up," he says.

Although those charged with disaster co-ordination are making confident noises that preparedness is a lot higher than in New York on September 11, the City still has a way to go, says Mr Eskritt.

"We are in a different world - planning has to take account of truly massive events - so far so good but more needs to be done."