UK vows to resist 'dubious' EU pressure

The relationship between the European Union and former member the United Kingdom could sink to a new low if the bloc insists on trying to make British banks leave London in order to continue with certain types of trading, the governor of the Bank of England has warned.

Andrew Bailey said the bloc's apparent determination to force banks to relocate their clearing activities for euro-denominated derivatives, from the UK capital to the eurozone, would escalate tension between London and Brussels.

He told lawmakers on the UK's Treasury select committee on Wednesday that Britain's exit from the EU had apparently revived an ambition within the bloc to see euro-denominated business concentrated inside the euro area.

The Financial Times quoted him as saying legislation to force such a relocation was unlikely, but that the EU would probably "attempt to force and cajole banks and dealers to say there will be some other penalty for you unless you move this clearing activity".

He said the pressure could result in London losing around a quarter of the $102-trillion euro-denominated business it holds.

Extraterritorial legislation

Bailey said the other 75 percent of euro-denominated business would likely remain in the UK capital, even if the EU did introduce extraterritorial legislation, because it is held by other overseas banks that would continue to find London more efficient and competitively priced.

Since the end of the Brexit transition period on Dec 31, the future of the UK's financial services sector, which is largely located in London, has come to the fore because the trade deal agreed between London and Brussels late last year barely mentions it.

With few commitments in place and negotiations set to continue, the sector is steeped in uncertainty.

London has traditionally handled around 90 percent of all euro-denominated deals but many insiders fear Brussels wants to use post-Brexit uncertainty to develop its own financial centers and reduce its dependency on the UK.

The Telegraph newspaper said Bailey was effectively warning Brussels against "plotting a protectionist power grab", something he said the UK must "resist very firmly".

And Sky News noted that Bailey said some measures reportedly being mulled to break the dominance of London in Europe's financial markets could be of "dubious legality".