The Bank of England (BoE) and Government have proposed new incentives that could persuade European institutions to remain in the City of London when the UK leaves.
BoE governor Mark Carney said this week the continent’s big banks could continue operating in the UK under existing rules and not face extra regulatory burdens after Brexit.
But he warned the move was dependent on Britain getting a good final deal with the bloc.
Now EU officials have complained what the UK has offered is no better than the current European Commission guidelines.
Under EU rules, banks can operate within the bloc if the regulations in their home country are equivalent to the bloc’s own rules.
But officials say this would not be the case with Britain’s offer and are concerned the arrangements could be withdrawn at any time.
Belgian Green MEP Philippe Lamberts claimed the proposals were meant as an olive branch but were not a big enough concession.
He told the Financial Times: “I take these gestures as a way to entice the Europeans to be nice to them. But I don’t think that will work.”
Speaking this week, Mr Carney stressed keeping Britain open to foreign banks after Brexit was key for economic growth at home and beyond.
And he pledged big European banks operating in Britain would face little change, as long as their supervisors in the European Union cooperated with London after Brexit.
However, the finance chief warned: “We retain all our options and if that is not forthcoming there will be consequences for those institutions.”
The BoE’s announcement, which was backed by Britain’s finance ministry, was a first salvo in an expected struggle with the EU over banking rules that will decide the long-term fate of London’s lucrative financial centre.
Theresa May has said Brexit will entail leaving the EU’s single market, raising questions about how British companies will do business in the bloc and European ones in Britain.
There are concerns Brexit would make cross-border supervisory cooperation harder and potentially hurt banks with a big London presence, such as Germany’s Deutsche Bank.
But the BoE said it would allow larger banks to operate as branches in the UK only if their home supervisors agreed to cooperate more closely with the BoE.
If not, they would be classed as subsidiaries, which would require them to park costly extra capital in Britain.
The BoE’s proposal appeared to indicate a softer British position than that of the EU.
Brussels has so far insisted that London-based banks will lose their free access to EU banking markets if Britain sticks to its plan to impose new controls on migration.
But Mr Carney said the two sides had a lot in common and sounded upbeat about prospects of a deal.
He told MPs: ”I don’t accept the argument that just because it hasn’t been done in the past it can’t be done in the future
London vies with New York for the title of the world’s financial capital, but many other EU capitals see Brexit as an opportunity to grab new business.
The EU has already proposed that clearing of euro-denominated derivatives, done mainly in London, could move to the euro zone if there is no comprehensive Brexit deal between EU and UK regulators.