The European Union threatens derailing its economic growth through changes to banking regulation after London beefed up its lending capacity following a Brexit boom.
The 27-state bloc is set to bring in new legislation which will effectively ban non-EU banks from providing core banking services – such as lending and taking deposits – without establishing a fully-authorised branch or subsidiary within an EU member state.
A new report from the New Financial think tank and City of London corporation warns the rules could hamper Europe’s economic growth.
“In times when the EU economy needs all the help it can get, this disruption could have a negative impact on the EU’s ability to finance strategically important projects and, ultimately, EU economic growth,” the authors note.
The report estimates up to a fifth of all EU bank borrowing could be hit by these changes, including political endeavours such as defence spending or the transition to net zero.
Nearly 12 per cent of total UK bank lending is directed towards EU counterparties, which could be threatened by the EU’s new Capital Requirements Directive, coming into effect from 2027.
According to the new report, 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.”
Assessing the relative health of financial centres in the wake of Brexit, the report notes that “EU banking activity involving UK institutions has surged 60 per cent since the 2016 referendum” and that “while UK banks have successfully diversified to other global markets (reducing their overall share of EU lending by 20%) the overall value of UK bank lending into the EU still remains higher than vice-versa.”
Meanwhile two-thirds of euro-denominated derivatives trading still happens in London, and a fifth of EU-domiciled investment funds are managed in the UK.
Calling for “for a more serious conversation about how both economies can work more closely together,” the report makes a series of recommendations including the creation of an enhanced EU-UK regulatory dialogue, mutual recognition of professional services qualifications and an exchange programme between UK and EU regulators.
Square Mile pivots to US
London has made its presence known on the global stage post-Brexit with 42 per cent of bank lending involving a non-UK counterparty, compared to just 18 per cent for the EU.
Meanwhile, the City has enjoyed strong relations with the US banking scene, with figures from the Macrothink Institute at the end of 2025 showing the top 5 US banks – Goldman Sachs, JP Morgan, Citi, Morgan Stanley and Bank of America – still hold a whopping 89 per cent of their total European operational staff in the UK.
Chancellor Rachel Reeves’ attempts to curry favour with the banking sector has helped boost investment from the US giants.
After dodging a tax raid in the Autumn Budget, JP Morgan laid out plans for a £10bn skyscraper in Canary Wharf – a move which is set to create an additional 7,800 jobs across construction and other local industries. Goldman Sachs also followed suit with a pledge to commit “several billion pounds” into UK infrastructure and add 500 jobs to its Birmingham site.
Warnings over Labour reset with Brussels
The City of London and New Financial report comes as some City chiefs sound the alarm over Sir Keir Starmer’s plans to water-down Brexit with concerns over incorporating EU regulation.
The Labour government is set to lay out a bill to “reset” the relationship with the EU in the coming months, following Starmer laying out his intentions to build closer trade ties.
Senior City figures have pushed back against such a move, the Financial Times reported, leading to the likely exclusion of financial services from any newly-negotiated economic ties.
Firms claim they have been able to take advantage of increased regulatory flexibility afforded to them in the aftermath of Brexit and being regrouped with the EU would abolish these privileges.
A top deregulatory measure included the abolition of the EU’s bonus cap role, which sets limits on bankers bonuses as a proportion of their salaries.
British bankers’ bonuses topped Wall Street last year, according to data from eFinancialcareers, which revealed workers pocketed an average $149,000 (£114,000) bonus in 2024, an over 25 per cent jump from last year and coming ahead of the US’ $145,800.
City Minister Lucy Rigby will travel to Brussels on Wednesday for meetings with EU officials, including the European Commissioner for Financial Services Maris Luis Albuquerque. She is expected to make the case that “by working closely together as open and free trading economies, the benefits will be felt on both sides of the Channel.”
While Treasury sources stress that financial services does not form part of 2025 UK-EU Common Understanding agreement, the UK “will continue to explore areas of cooperation where it is in our economy’s interest.”