The growing risk of a bad Brexit deal for the City of London is causing severe tensions between the Bank of England and the Treasury, according to reports.



Amid mounting fears that Brussels will reject plans put forward by the chancellor, Philip Hammond, for maintaining close ties with the EU for financial services, the Financial Times reported that Bank officials are at loggerheads with the Treasury over the search for a “Plan B” arrangement.



Threadneedle Street fears it could be left as a “rule taker” should Britain agree to a new deal that maintains European market access for financial firms without giving the Bank sufficient control over City regulations in future. The concerns stem from the sprawling scale of the City as one of the biggest financial centres in the world.



Mark Carney, the Bank’s governor, used a speech in London last week to highlight the risks posed to the financial system from Brexit and said it was one of the issues raised by Britain leaving the European Union that made him most “nervous”. He also warned in plain terms last year that “we do not want to be a rule taker as an authority”.



According to the FT, a number of officials at Threadneedle Street said Jon Cunliffe, the Bank’s deputy governor for financial stability, had fallen out with the Treasury over the issue. The paper quoted one anonymous official saying “the fear is the Treasury is going to give it all away”.



The breakdown in relations comes as Hammond strives to prevent an exodus of international banks from the Square Mile, having attempted to reassure them in March that the UK would seek to maintain European market access after Brexit.

But the EU has vocally dismissed the UK government’s current proposals – which would see both London and Brussels accept mutual recognition of each other’s regulations covering the financial services sector.

The chancellor has previously warned the UK could reject any post-Brexit trade deal with the EU that excluded financial services. However, the FT said a Plan B could be required as a fallback option, with damaging consequences for relations between the Bank and No 11.

A spokesman for the Bank of England rejected the suggestion of a rift with HM Treasury.