Britain’s Regions Branded Junk‑Bond Risk as London’s Financial Domination Leaves the Rest in the Cold

11 July 2025

London buses cross Waterloo Bridge as St Paul's Cathedral is seen together with skyscrapers in the City of London financial district · Reuters

New research revealed in the journal Fiscal Studies paints a stark picture of Britain’s investment landscape, showing that cities outside London are treated as high-risk on par with “junk bond” assets while the capital continues to absorb nearly all financial attention. Investors expect a hefty risk premium of roughly 250 to 300 basis points on projects beyond the capital, far exceeding premiums in comparable European cities. The imbalance signals profound structural fault lines in the U.K.’s financial and economic framework.

This disparity stems from the erosion of regional banking institutions since the 2007-08 financial crisis. Policies favouring London, such as rounds of quantitative easing from the Bank of England, further entrenched the capital’s supremacy while doing little for local economies. In regions outside the capital, the cost of borrowing skyrockets and capital flows dry up, making commercial investment rare and expensive.

“Until now we have had no sense of how deeply segmented the UK market really is,” observes Philip McCann, co-author of the study and chair of urban and regional economics at the Productivity Institute, part of Alliance Manchester Business School. He notes that investors do not perceive the U.K. as a seamless economic territory, but rather one dominated by London with a rigid divide beyond it.

Today, the premium on risk in regional U.K. markets rivals yield gaps observed in sovereign debt for countries like Romania or Hungary. That comparison underscores the financial gulf: while a project in London is seen as secure, even modest schemes in cities like Manchester, Birmingham, or Glasgow are met with considerable scepticism . The result: vast untapped potential in regional economies goes unrealised.

Prime Minister Keir Starmer has made regional equity a political priority. His government’s agenda includes devolving powers to local authorities and enhancing skills training. However, the research argues that these efforts fall short unless real banking reform accompanies them. Reviving local capital markets and lending institutions is essential to channel private investment into areas long neglected.

Previous administrations also addressed regional investment divides, including Boris Johnson’s “levelling up” plan, but tangible outcomes were limited. The structural dominance of London remained largely intact. The researchers maintain that real change requires rebuilding institutions capable of underwriting local projects. They propose leveraging national instruments like the British Business Bank and the U.K. National Wealth Fund to seed lending in under-invested regions.

Critically, the study shows that rounds of quantitative easing overwhelmingly benefited London and its immediate surroundings, with no spill-over effect to regional commercial infrastructure. Despite the Bank of England’s view that easing supports the entire nation, evidence suggests otherwise, London’s asset-rich environment absorbed the gains, while local economies stagnated .

A companion piece of Reuters analysis highlights London’s economic might: the capital has increased its share of the national economy from around 20 percent in 2000 to approximately 24 percent today, while the rest of the U.K. has not seen equivalent gains. That concentration contrasts sharply with Germany or France, where regional growth is more evenly distributed.

The problem begins with local banking: where Germany and the U.S. maintain strong regional lenders, Britain has seen its local banking networks hollowed out. This leaves regions without the means to finance commercial opportunities or even modest development projects. Instead, money flows to London, reinforcing the centralisation spiral.

McCann and his co-authors recommend policy interventions: rejuvenating regional finance through public institutions, encouraging private partnerships to back local ventures, and nurturing intermediary organisations with regional insight and lending capacity. Without this foundation, the “economic desertification” beyond London will persist, undermining national growth and cohesion.

Reviving regional financial markets could break the London chokehold, spread growth more evenly, and catalyse revitalisation in neglected areas. But that transformation demands political courage and structural innovation. With the next election looming, the U.K. government faces a pivotal moment: accept the structural divide or act to heal it.

This research arrives amid growing public scrutiny over regional inequality. As policy makers and investors digest these findings, the question is whether Britain can rebuild regional financial resilience or remain locked into a hyperLondon-centric future.