Banks unlikely to leave the UK over new regulations, Osborne tells MPs

George Osborne told the Treasury Select Committee that the changes, which will force banks to split their investment banking activities from their customer-facing services, would not affect London's competitiveness as a financial centre.

"I think that these proposals will make Britain the best regulated - not the most over-regulated - centre for a universal bank, and when you look at the realistic alternatives for those banks, we've got a very good deal," he said.

"When you think of the other financial centres where you might locate a large universal bank – the US has Dodd Frank, the eurozone the prospect of a financial transaction tax and Asia some of its political issues. The UK is a fantastic place to locate a universal bank, and those banks have an interest in a well-regulated banking system," he said.

The Chancellor said that the reforms, as recommended by Sir John Vickers' Independent Commission on Banking (ICB) last year, helped to solve the "dilemma" of making the UK the home of successful international banks while protecting taxpayers from the activities of those banks.

In December, Osborne told Parliament that a white paper outlining how the Government will implement the full package would be published in the spring. Necessary legislation will go through Parliament before the 2015 election, he said.

The ICB's final report recommended that retail banking activities be provided by a separate subsidiary of a wider banking group which should be legally, economically and operationally distinct from the group's investment banking activities. Taking payments from and providing overdrafts to individual customers and small and medium-sized businesses will be included within this 'ring fence'.

The report also proposed that large UK retail banks should hold tier one capital of at least 10% of their risk-weighted assets, meaning that for every £10 that banks lend out they must hold £1 in reserve against potential losses. This is stricter than the level proposed under the international banking agreement known as Basel III, which provides that banks have equity capital of at least 7% of their assets adjusted for risk by 2019. Tier one capital consists in the main of shareholders' equity and disclosed reserves.

Osborne told the Committee that he "did not accept" that banks would need to increase the cost of their lending to individual customers in order to fund the implementation of a ring fence.

"They could actually reduce - shock, horror - their remuneration packages. That might be another way to absorb these costs," he said.

Vickers' proposals would have "almost certainly" prevented the near-collapse of Northern Rock, which was transferred into temporary public ownership in 2008. The £747 million sale of the bank to Virgin Money was finalised on 1 January.

Banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that the Government should not to be too heavy-handed when introducing the reforms.

"The Government must be very careful in implementing the reforms in their entirety," he said. "The geographic location of the ring fence around key banking operations is limited to Europe. This will make it difficult for UK banks to compete with foreign banks in providing cash management and account operation services to UK companies, including manufacturers, with operations extending beyond Europe."

Cash management services dealing with the day-to-day collection and disbursement of cash are not a particularly risky area for banks, Anderson said. However, they are becoming increasingly important due to their minimal impact on bank balance sheets and their importance in establishing and building on customer relationships.