Bank separation 'will cost retail players £15bn a year'

Forcing UK banks to "ring-fence" or demerge their retail and investment banking arms could cost the five biggest high street players £15 billion a year, according to a stark new report.

The confidential research, which was commissioned by Britain's leading financial institutions, warns the UK will be strongly disadvantaged if it goes it alone on separate capital structures for retail and wholesale banking. It has been submitted to the Independent Commission on Banking (ICB), which is due to report next month.

Disclosure of the research came as sources close to Barclays yesterday threw cold water on a report that the financial behemoth told the Treasury that it could quit Britain for the US if the government supports a break-up of the banks.

The company recently replaced John Varley as chief executive with Bob Diamond, its American-born former investment banking boss.

Barclays declined to comment yesterday on suggestions that Varley, now the company's top government adviser, had warned Treasury officials that a relocation of the group head office remained on the table.

But one insider said: "It (the speculative report] is total rubbish. We don't recognise anything of what is being said about relocation threats, the US or otherwise."

However, the apparent categorical denial is unlikely to assuage City fears that the ICB, which produces its interim report in three weeks' time, is minded to recommend some distancing of banks' retail and wholesale arms.

The main banks affected would be Barclays, HSBC, Royal Bank of Scotland, Lloyds Banking Group and Standard Chartered Group - the latter having a UK-listing despite being focused on Asia and emerging markets.

The report to the ICB, carried out by management consultants Oliver Wyman, is understood to conclude that there are significant dangers in forcing banks to have separate capital structures, a process called "subsidiarisation".

It claims the annual costs would be between 12bn and 15bn, as banks would be prevented from transferring capital easily between different divisions.

The likes of Barclays, HSBC and RBS would have to access expensive and complex multiple sources of funding to underpin their current global structures, the Wyman research is believed to claim.

It argues that such "frictional costs" would hit profitability noticeably, and would call into question the value of keeping group headquarters in the UK.

Stuart Gulliver, the new chief executive at HSBC who, like Diamond, is also a former investment banking head, repeated at the group's recent annual results that the firm was still currently committed to retaining its UK domicile.But he added that HSBC had to keep all competitive issues, including potential relocation, under review.

One banking analyst said yesterday: "You can see the main strategy of the banks towards the ICB hardening. They have probably judged privately that the regulatory mood music is moving towards some form of separate capital structures for retail and investment banking, but with the olive branch of no enforced absolute split. And they don't like it."