Fifty economists and policy experts have issued a warning to Rachel Reeves that encouraging the City to expand could threaten financial stability and jeopardise growth.

The chancellor has called the UK’s financial services sector “the crown jewel in our economy” and has claimed that regulations imposed after the global financial crisis have “gone too far”.

Reeves has tweaked the remit of the City regulator the Financial Conduct Authority (FCA) and has urged it to support the growth and competitiveness of the sector, alongside protecting consumers.

But responding to a call for evidence by the Treasury, 50 experts said deregulating the City would work against Labour’s wider aims.

They claimed that allowing the financial services sector to expand further risked “undermining the government’s efforts to grow the economy,” and also posed “particular risks to the government’s wider industrial strategy and missions”.

Signatories included the Nobel laureate Joseph Stiglitz, the Labour peer and anti-poverty campaigner Ruth Lister, the economist Sir John Kay and the former FFCA board member Mick McAteer.

They claimed that the City sucked talent and resources away from potentially more productive activities, and that the “vast majority” of lending went towards driving up the price of existing assets, such as property, instead of backing businesses.

“The wealth of empirical evidence showing that, beyond a certain threshold, financial sector growth harms the wider economy,” their statement said, adding: “History has shown time and time again that beyond a certain point, the financial sector can only continue to grow by taking excessive risks and increasing the economy’s debt burden until the inevitable collapse.”

Their fears, set out in response to the Treasury’s financial services growth and competitiveness strategy consultation, echoed those of the chief executive of the FCA. Last week, Nikhil Rathi said changing the City regulator’s remit to allow more risk taking would result inevitably in more bad actors slipping through the net.

“We can’t stop everything. If we’re going to allow more risk into the system … it sometimes does attract people who don’t have the best of intentions,” he said.

The Bank of England governor, Andrew Bailey, also warned in a recent speech that policymakers should not “fall into the trap of complacency” about the risks of a financial crisis.

Signatories to the statement, which was coordinated by the campaign group Positive Money, suggested that Reeves remember the fate of the last Labour government, which favoured “light-touch” regulation of the City, only to be forced to use taxpayers’ money to bail out a string of large banks.

After the financial crisis, which plunged the UK into recession, the chair of the FCA’s predecessor, the Financial Services Authority, conceded that much of what the sector did was “socially useless”.

Positive Money’s head of policy, Simon Youel, said: “If the government wants to make regional economic growth its central mission, the evidence suggests that the last thing it should be doing is further inflating the size of the City of London.”

The economists who signed the statement pointed to studies by the International Monetary Fund and Bank for International Settlements that suggested that a large finance sector started to have negative effects on the economy when private credit was the equivalent of at least 100% of gross domestic product. In the UK, they said, it had averaged 160% of GDP since 2000.

Other signatories to the statement included the geographer of inequality Prof Danny Dorling, the tax havens expert Nicholas Shaxson and the University College London professor of economics and finance Josh Ryan-Collins.

A Treasury spokesperson pointed out that the financial services sector employs 1.2 million people across the UK, two-thirds of them outside London. They said: “Growth and driving more investment in the UK is our number one mission, and the only way to sustainably raise living standards. The financial services sector is a key part of that mission.”

In her Mais lecture last March, setting out her economic philosophy, Reeves said one of the lessons of the Blair-Brown governments was that “an underregulated financial sector could generate immense wealth but posed profound structural risks too”.

But she told senior bankers at the Mansion House dinner in November: “Financial services must play a central part in our economic vision, and our plans for economic growth.”

However, instead of unleashing the City, the signatories to the statement urged the chancellor to regulate it more stringently, in order to ensure it served growing businesses.