Europe is shaking up its banking industry and post-Brexit Britain could get frozen out

The European Union is shaking up its banking rules and it is not good news for the City.

The EU proposed rules that are aimed at making local subsidiaries of foreign banks in European countries stronger and safer. However, the result will make those units more expensive to run.

That is not good news for the City, which is facing the loss of its single market membership and ability to provide international banks with a so-called financial services passport.

Valdis Dombrovskis, the EU's financial services commissioner, said: "Europe needs a strong and diverse banking sector to finance the economy."

"We need bank lending for companies to invest, remain competitive and sell into bigger markets and for households to plan ahead. Today, we have put forward new risk reduction proposals that build on the agreed global standards while taking into account the specificities of the European banking sector," Dombrovskis said.

The EU proposed three new pillars of financial regulation. One of which is based around toughened capital and liquidity requirements for lenders' subsidiaries in Europe, in order to make those business units safer and weaken the wider economic impact of their failure in the event of a crisis.

In particular, it will require banks to meet a Total Loss-Absorbing Capacity threshold.

The rule forces banks to issue special kinds of debt which can be written down quickly and easily in a crisis, replacing past public bailouts with private losses in the future.

Because these new debt instruments come with a higher risk of being wiped out if the bank gets into trouble, investors are likely to demand higher interest rates, costing the bank more money.

The rule "is applicable to all banks, and will strengthen the EU's ability to resolve failing G-SIIs (globally systemic financial entities) while protecting financial stability and minimising risks for taxpayers," the EU said in a statement on Wednesday.

The amount of debt banks have to issue to investors will be calculated at the level of the subsidiary rather than the group, meaning each European base of operations for non-European banks will have to meet the requirements. This is more costly and raised fears the EU is acting to protect its own banks against foreign competitors.

And, if the UK does fully leave the single market, that will include banks headquartered in the City.