Cosseting the City or Keeping It in Check?

For decades, the City of London has been treated as the crown jewel of the British economy. Governments of all political colours have cosseted banks and financial institutions, convinced that a thriving financial sector is the key to faster economic growth, higher tax revenues, and global influence. The current chancellor is no exception, signalling a desire to keep City lenders comfortable in the hope they will fuel growth across UK plc.

Yet a growing body of evidence suggests this long-held assumption may be flawed. Far from acting as an engine for broad-based prosperity, an overpowered financial sector can distort the economy, drain talent, and divert capital away from productive investment. Instead of pampering lenders, studies increasingly argue that Britain would be better served by keeping finance firmly in check.

The Logic Behind Cosseting the City

The case for supporting the City appears straightforward. Financial services are a major contributor to UK GDP, provide high-value jobs, and generate significant tax revenues. The City also underpins Britain’s role as a global hub for investment, insurance, and capital markets.

From this perspective, loosening regulations and creating a “competitive” environment for banks seems sensible. If lenders are free to innovate, lend more, and attract global capital, the theory goes, growth will follow.

This belief has shaped policy for years. Regulation is often framed as a threat to competitiveness, while bankers are presented as vital partners in national prosperity.

The Growth That Never Quite Arrives

Despite this preferential treatment, the promised growth has often failed to materialise. UK productivity has stagnated, regional inequality has widened, and real wages have struggled to keep pace with inflation.

One reason is that financial sector growth does not automatically translate into economic growth elsewhere. Banks frequently channel capital into property, financial speculation, and asset inflation rather than into manufacturing, innovation, or small business expansion.

When finance grows faster than the real economy, it can become detached from productive activity. The result is higher house prices, rising debt, and fragile growth built on paper wealth rather than real output.

What the Evidence Says

Multiple academic studies have shown that beyond a certain point, an oversized financial sector actually drags on economic growth. Countries with disproportionately large banking sectors often experience:

Lower productivity growth

Greater economic volatility

Increased inequality

Reduced investment in productive industries

Finance is essential, but excess finance can crowd out other sectors. Talent that could drive innovation in engineering, technology, or science is instead absorbed by banking and financial services, where returns are higher but broader economic benefits are weaker.

Lending Priorities Matter

A key issue is not how much banks lend, but what they lend to. UK lenders have long favoured property and financial assets because they are perceived as safer and more profitable than investing in businesses that produce goods or develop new technologies.

This bias creates a cycle where:

House prices rise faster than wages

Businesses struggle to access patient capital

Innovation is underfunded

Economic growth becomes unbalanced

Cosseting lenders without guiding their behaviour reinforces these distortions rather than correcting them.

Regulation as an Economic Tool, Not a Burden

The idea that regulation stifles growth is deeply ingrained in political discourse. In reality, smart regulation can redirect financial activity toward productive ends.

Rules that discourage excessive risk-taking, speculative lending, and short-term profit chasing can help ensure banks support the wider economy. Far from driving finance away, stable and well-regulated systems often attract long-term investment by reducing the risk of crises.

The 2008 financial crash remains a stark reminder of what happens when lenders are left unchecked. The cost of rescuing the banking system was borne not by financiers, but by taxpayers and public services.

UK plc Needs Balance, Not Blind Faith

UK plc is not a bank. It is an economy made up of workers, businesses, communities, and regions with diverse needs. Treating the City as the primary engine of growth ignores the importance of:

Manufacturing and industry

Research and development

Infrastructure

Skills and education

Regional investment

When policy is overly focused on appeasing lenders, these areas risk being neglected. Growth becomes concentrated in London and the South East, while other regions fall further behind.

International Lessons

Countries with strong, sustainable growth often maintain tighter control over finance while actively supporting productive sectors. Germany’s regional banking model, for example, emphasises long-term lending to local businesses. East Asian economies have historically used financial policy as a tool to support industrial strategy rather than speculation.

These models challenge the idea that a lightly regulated, finance-led economy is the optimal path to prosperity.

The Political Comfort of the City

Part of the reason chancellors continue to cosset the City is political convenience. Financial markets react quickly to policy signals, and governments fear capital flight, falling investment, or market backlash.

But governing in the long-term interest of UK plc requires resisting short-term pressure. Appeasing lenders may buy temporary calm, but it does little to address the structural weaknesses holding the economy back.

A Different Approach to Growth

Rather than treating finance as an untouchable engine of growth, policymakers could:

Strengthen regulation to curb speculative excess

Incentivise lending to productive businesses

Support regional and sectoral investment banks

Align financial policy with industrial strategy

This does not mean punishing banks, but redefining their role as servants of the economy rather than its masters.

Final Thoughts

The chancellor’s instinct to cosset City lenders reflects a deeply rooted belief in finance-led growth. But mounting evidence suggests that this approach has delivered diminishing returns for UK plc.

Finance is a powerful tool, but like any tool, it must be used carefully. Left unchecked, it distorts incentives and weakens the foundations of long-term growth. Kept in balance, it can support innovation, productivity, and shared prosperity.

If Britain is serious about rebuilding its economy, the challenge is not how to please the City, but how to put it back in its proper place — as a means to an end, not the end itself.