Britain risks being "marginalised" by the eurozone's move towards banking union, a parliamentary committee has warned.
As EU finance ministers met in Brussels to discuss plans for a single supervisory mechanism for banks in the single currency area, the House of Lords EU Committee wrote to the Treasury to raise concerns about the scheme.
Banking union could damage the City of London by leaving the UK on the margins of financial decision-making and hurt the British economy by threatening the integrity of the single market, the committee warned.
The meeting is intended to set the scene for a European Council summit in Brussels on December 13-14, at which EU leaders including Prime Minister David Cameron will discuss the plans for banking union.
Lord Harrison, chairman of the cross-party Lords EU Sub-Committee on Economic and Financial Affairs, said Mr Cameron must be prepared to defend the City's interests at next week's gathering.
"The Government's confidence that the City will not suffer because of the UK's choice to remain outside banking union could prove misplaced," said the Labour peer. "The Government must do all they can to ensure that the UK's pre-eminence is retained, not assume that it will always remain."
The committee is due to produce a report on European banking union before next week's summit, but wrote to Financial Secretary to the Treasury Greg Clark to outline its concerns.
The peers warned that the UK could be marginalised as banking union participants develop common positions on financial sector issues.
The levels of financial integration proposed for eurozone countries could "threaten the integrity" of the single market, with significant implications for countries outside the banking union, such as the UK, they said.
And they called for "far stronger" safeguards to prevent conflicts of interest between the European Central Bank's supervisory and interest rate-setting roles. The letter voiced regret that German opposition meant the plans for a single supervisory mechanism were not being matched by the common deposit insurance and resolution schemes which the committee regards as necessary for a viable banking union.