By Andrew MacAskill and Huw Jones
LONDON (Reuters) - The bosses of some of Europe's biggest banks will ask Britain's Prime Minister Theresa May on Thursday to give them a reason to stay in the City of London after Brexit now that hopes are fading for a generous EU trade deal.
May will dine with bank and insurance chiefs who are members of the European Financial Services Round Table and discussions could shed light on what the government wants from Europe for financial services. This group includes banks and insurers from around Europe, such as Deutsche Bank <DBKGn.DE>, Societe Generale <SOGN.PA>, Barclays <BARC.L> and Aviva <AV.L>.
Barclays' Chairman John McFarlane is hosting the dinner near the Houses of Parliament where executives will push May and finance minister Philip Hammond for details of their financial services plans.
"We are expecting her to make a statement about why we should stay here," said one executive who will be attend. "We need clarity, they are not thinking enough about sector and we need to change that."
Brexit poses the biggest challenge to the City of London's finance industry since the 2007-2009 financial crisis as it could mean banks and insurers will lose access to the EU, the world's biggest trading bloc.
For months the government, financial regulators and major banks in Britain have been unified in backing a "mutual recognition" blueprint for two-way market access after Britain leaves the EU next March.
This involves Britain and the EU accepting the broad thrust of each other's rules, a flexible but largely untested approach in trade compared with the bloc's current more narrow and demanding mechanism for granting foreign companies access to its markets.
But facing scepticism from Brussels, senior financial executives now say they no longer believe that mutual recognition is realistic, casting a shadow over Britain's biggest economic sector.
Reuters spoke to senior executives at 12 of the largest banks in London, including the five biggest British banks, and found not one of them privately thought the plan would ever be accepted by the EU. They are resigned to a deal that will give more limited access.
"I don't know anyone who really thinks this has a realistic chance, the EU has made it clear they won't accept it. It is now time to be more realistic about what we can negotiate," a senior executive at one of Britain's biggest banks said.
If the finance industry does abandon mutual recognition this would mark its second major climb-down. Banks have already given up on efforts to keep full "passporting" in financial services that they currently enjoy as part of Britain's EU membership.
Against this uncertain backdrop, banks, insurers and asset managers, have been moving activities and hundreds of staff from London to new EU hubs to they can ensure continuity with customers when Britain leaves the EU in March, irrespective of the trading terms agreed with Brussels.
Britain is due to publish a white paper formally setting out what sort of future trading terms it wants with Europe - and this should signal to bankers if mutual recognition is still the preferred option.
A banking industry official said there appeared to be an "almighty row" over the wording covering financial services in the white paper, suggesting that the proposal will be "far less ambitious than mutual recognition".
Bankers are also toning down talk of mutual recognition, saying that it was outcomes rather than terminology that mattered.
One senior executive said it was not clear if the government was still willing to back the proposal.
A government document on its EU proposals for a financial services deal published last month failed to mention mutual recognition.
"Part of the problem for the City is that the government hasn't come clean yet. Until you know what the government settles for, it's difficult for the City to move forward," the executive said.
The mutual recognition blueprint was drawn up by TheCityUK, which promotes Britain's financial services sector, and banking lobby UK Finance.
They persuaded the government to back the idea as a template that could be included in a bespoke UK trade deal with Europe.
But finance industry officials say banks have painted themselves into a corner and are unable to ditch the blueprint until there are signs the government has moved away from it.
"TheCityUK and UK Finance came up with this mutual recognition idea and sold it to the government as doable, but the EU has said it's crazy," said Graham Bishop, a consultant who has advised EU institutions on financial services.
"The City is now afraid of saying it's not feasible so nobody senior in financial services is prepared to say its unworkable."
TheCityUK said mutual recognition remains the best option currently on the table, while UK Finance said it could be implemented based on trust built up between UK and EU regulators over decades.
But financial services companies without an EU base may now have to fall back on the EU's current market access system known as equivalence, which banks and the British government have already rejected as unworkable.
Under equivalence, only Brussels would grant market access unlike mutual recognition in which Britain and Brussels would both have a say.
"The majority of clients think equivalence is most likely as the EU side has been very clear," said John Liver, a partner at EY which is advising banks on Brexit issues.
(Reporting By Andrew MacAskill and Huw Jones, editing by Jane Merriman)