New Research Reveals Deep Financial Divide Between London and the Rest of the UK
A new study by The Productivity Institute published in the journal Fiscal Studies uncovers stark financial disparities between London and the rest of the UK, raising urgent questions about the effectiveness of national monetary policy and the structure of the UK’s banking system.
The paper, Regions, cities and finance: the role of capital shocks and banking reforms in shaping the UK geography of prosperity, is authored by Michiel Daams, Colin Mayer and Philip McCann (online supplementary material is also available).
Drawing on uniquely detailed real estate investment data, the researchers reveal four key findings:
- One Country, Two Economies
Since the 2008 global financial crisis, financial markets have increasingly treated the UK as two distinct economies: London and its surrounding areas, and the rest of the country. This divide has had profound implications for investment and economic growth. - Investment Gaps Comparable to International Differences
The study finds that investment risk and returns in London differ dramatically from those in other UK regions – by as much as 200–300 basis points. These gaps are similar to the differences in sovereign yields between the UK and countries like Romania or Chile. - Monetary Policy Falling Flat Outside London
Despite years of monetary stimulus, including quantitative easing, the rest of the UK has seen little to no benefit. The research suggests that these policies have had virtually no impact on investment conditions outside the capital, with many parts of the UK having been shocked into long-term ‘junk bond’ territory. Non-London cities experience an “immense” risk premium for projects. - A Centralised Banking System at the Heart of the Problem
The authors argue that the UK’s highly centralised banking system is both a cause of and a barrier to resolving these regional disparities. They call for urgent reforms to create more localised and responsive financial institutions that can better serve communities across the country.
Philip McCann, co-author of the paper and Sir Terry Leahy Chair of Urban and Regional Economics at Alliance Manchester Business School, said:
“This research highlights the urgent need to rethink how finance is structured and delivered across the UK. Without reform, the economic divide between London and the rest of the country will only deepen.”
What Needs to Change?
The study calls for urgent reform of the UK’s London-centric financial system, which lacks the infrastructure to support regional growth. Strengthening local financial ecosystems and professional services outside the capital is key to unlocking investment and revitalising regional economies.
But finance alone won’t fix the problem. The authors also advocate for greater devolution – giving local authorities more power to raise funds, reform planning systems and support business investment. A coordinated national effort, led by institutions like the British Business Bank and the UK National Wealth Fund, could help reconnect London’s capital with the rest of the UK and drive inclusive economic renewal.
