Banks in London are shedding staff, closing or cutting divisions and seeing pay fall as criticism by politicians, tighter regulations and falling profits take their toll on the financial services sector.

Bloomberg reported that London’s Square Mile district has shrunk more than any financial center in the world as it seeks to shed size and make its operations more efficient. Michael Kirkwood, 64, former head of Citigroup’s U.K. division, who began his career in the Square Mile in 1965, was quoted saying, “We’re going to end up with a smaller, more focused financial sector. The entire financial world became too bloated in the run up to the financial crisis, and London was excessively bloated.”

John Mann, a Labor Party lawmaker, was quoted saying, “The whole industry needs to be consolidated and needs to be shrunk. It’s too powerful. That is to the huge detriment of the long-term sustainability of economic growth in this country.”

London houses the world’s biggest center for foreign-exchange trading, cross-border bank lending and interest-rate derivatives. Tighter regulations, including the threat of a financial transaction tax and demands for higher reserves, angry politicians who blame the financial sector for much of Europe’s debt woes, and the falling demand for services in an environment beset by recession or the threat of it have pushed the sector to trim whatever it can, wherever it can. It is doubtful that Britain will emerge unscathed, since a high percentage of the nation’s tax receipts–12%–come from finance.

Philip Keevil, a former head of North American investment banking at S.G. Warburg & Co. and now a partner at New York-based advisory firm Compass Advisers, was quoted saying, “Most of the main sales and trading desks in Europe, Middle East and Africa are here. Insofar as global banks have to make cuts in these areas because of Basel III and other regulations, then the cuts will be in London.”

The Basel Committee on Banking Supervision’s latest capital and liquidity rules will cut investment banks’ return on equity to 7% from 20%, according to a McKinsey & Co. report published in September. That will reduce after-tax profits from $40 billion to $30 billion for the biggest 13 banks, it said.

Many banks are now exiting capital-intensive activities such as proprietary trading. Others, according to Ian Baggs, global banking and capital markets deputy leader at Ernst & Young in London, are concentrating on increasing the volume of trades made with client money in markets such as interest-rate swaps, rather than proprietary trading, which uses the bank’s own money to take positions and carries a high regulatory capital requirement.

Bloomberg data shows that financial services firms in the U.K. cut 58,000 jobs last year, more than any other country in the world and 45% percent of the cutbacks announced by all western European banks. The Center for Economics & Business Research has said that employment for London’s bankers over the next two years will stay under 1998 levels.

Giles Williams, head of KPMG’s financial-services regulatory center of excellence in London, said in the report, “Institutions that aren’t in the top positions in certain products will begin to exit those products. Banks will focus on what they are good at and what they’re famous for.” He added that proprietary trading in fixed income, commodities and derivatives markets will likely be the hardest hit.