The European Central Bank fears that international banks based in London are overly relying on "empty shell" units to continue working in Europe after Brexit, while keeping key services in the UK capital, sources said on Monday.
The ECB's chief supervisor Daniele Nouy voiced her concern to a meeting of eurozone ministers in Brussels, with the effects of Britain's divorce from the European Union becoming a major worry.
According to sources familiar with the matter, Nouy sounded an alarm that global banks are setting up headquarters on the European continent in name only, while keeping most operations still standing in London.
This is a huge issue as the UK tries to hold onto the dominance of its London financial hub despite Brexit, all while Frankfurt, Paris and Dublin strive to take advantage of Britain's euro-divorce.
London, for its part, is fretting while big banks sound out regulators in different EU nations as they look for a new base to do business in Europe once Britain leaves.
If Britain goes ahead with a so-called "hard Brexit", in which the UK loses all special ties to the EU, banks based in London will lose the "passports" that allow them to do business out of the UK across the remaining 27 members of the bloc.
Instead, to continue operating in Europe, financial firms will have to set up new business headquarters in EU countries.
Frankfurt has already claimed some major financial players as a post-Brexit headquarters, including US investment bank Morgan Stanley and Japanese giants Sumitomo Mitsui Financial Group, Daiwa Securities and Nomura.
Goldman Sachs chief executive Lloyd Blankfein last month caused a firestorm on twitter, touting Frankfurt's "great" weather among other attributes, but stopped short of naming the German city as a post-Brexit headquarters.
Some 10,000 UK financial services jobs could move abroad on the first day of Brexit, the Bank of England predicted Wednesday.