European banks need to plug a €40 billion capital hole in London after Brexit

European banks will need to inject as much as €40 billion (£29 billion) of capital into their UK operations in order to keep doing business in the country after Brexit, according to a report from Boston Consulting Group.

Under EU law at the moment, European banks can operate branches in the UK that do not need to be separately capitalised from the parent company abroad.

The use of this passport, which allows them access to the single market of 28 nations, in London is under threat after the Brexit vote.

With the UK out of the EU, European banks will have to set up subsidiaries, forcing them to pump extra capital into the UK. Much of European banks' derivatives and wholesale markets operations are based in London.

The report, cited in the Financial Times, said leaving the EU would make doing business in London up to 22% more expensive for European banks. This would force banks to rethink how much activity they would want to conduct in the UK in the future.

"For some banks, Brexit could accelerate their withdrawal from parts of the value chain," BCG said, adding that others "might take advantage of the situation by re-engineering their operating model, aggressively implementing cost reduction programmes and restoring performance," the FT said, citing the report.

While Dublin, Frankfurt and Paris are making a bid for London's financial crown, Madrid is also in contention according to JPMorgan banking analyst Kian Abouhossein.

Abouhossein took a look at office rents and capacity in different EU cities, with Madrid coming out on top both for cost and supply, in a note to clients this week.

NOW WATCH: We tested an economic theory by trying to buy people's lottery tickets for much more than they paid

Please enable Javascript to watch this video