A major new report has issued a stark warning that proposed European Union banking regulations could severely restrict investment flowing from the City of London into the bloc, potentially undermining crucial projects from defence to the green transition.
EU Directive Threatens Post-Brexit Lending Boom
The analysis, published by the New Financial think tank and the City of London Corporation, focuses on the EU's forthcoming Capital Requirements Directive. This legislation, set to take effect from 2027, will effectively bar banks based outside the union from providing core services like lending and deposit-taking unless they establish a fully-authorised branch or subsidiary inside an EU member state.
The report argues this move comes at a precarious time. It states the regulation "could potentially choke investment from London at a time when the EU’s economy is stagnating and needs large sums of additional investment." The authors estimate that up to a fifth of all EU bank borrowing could be impacted, jeopardising financing for strategically vital political goals.
London's Strength and a Call for Cooperation
Despite Brexit, the financial ties between the UK and EU remain deep and significant. The report reveals that EU banking activity involving UK institutions has surged by 60% since the 2016 referendum. Furthermore, nearly 12% of total UK bank lending is directed towards EU counterparties, a flow now under threat.
London has also consolidated its role as a global financial hub. Key findings include:
- Two-thirds of all euro-denominated derivatives trading still occurs in London.
- A fifth of EU-domiciled investment funds are managed in the UK.
- 42% of UK bank lending now involves a non-UK counterparty, compared to just 18% for the EU.
In response, the report urges a "more serious conversation" on UK-EU economic collaboration. Its recommendations include establishing an enhanced regulatory dialogue, mutual recognition of professional qualifications, and an exchange programme for financial regulators.
City Pivots to US as Labour's EU 'Reset' Faces Warnings
While EU relations face hurdles, London's financial sector has strengthened its links with the United States. Data shows the top five US banks – Goldman Sachs, JP Morgan, Citi, Morgan Stanley and Bank of America – still keep a massive 89% of their total European operational staff in the UK.
This relationship is bearing fruit. Following the Autumn Budget, JP Morgan announced plans for a £10bn skyscraper in Canary Wharf, a project expected to create 7,800 jobs. Goldman Sachs also pledged billions for UK infrastructure and 500 new roles in Birmingham.
The report emerges alongside City concerns over the Labour government's plans to "reset" relations with Brussels. Senior figures have pushed back against incorporating EU regulations, having benefited from post-Brexit flexibility. One major deregulatory win was scrapping the EU's bonus cap, with British bankers' average bonuses reaching $149,000 (£114,000) in 2024, surpassing Wall Street.
City Minister Lucy Rigby is due in Brussels to meet EU officials, including Commissioner Maris Luis Albuquerque, to advocate for open cooperation. While financial services are not part of the current UK-EU agreement, the Treasury states it will "continue to explore areas of cooperation where it is in our economy’s interest."
