Fear of a UK banking exodus away from London to the US (Barclays) and Asia (Standard Chartered and HSBC) has dampened this week after the publication of an industry report.

The much-anticipated review of the UK banking industry by the Independent Commission on Banking (ICB) was unveiled this week with much fanfare in the British media.

The outcome seems to be something which is palatable to both taxpayers and the banks themselves.

On the one hand there are suggested measures to protect taxpayers and to allow for the orderly wind-downs of failed banks; while on the other, the call to break-up the banks – a chief concern of banks suggesting they may flee the City if that happened – has been reduced to ring-fencing the retail arms of retail banks.

However ring-fencing quickly raised fears among investment banks that they would struggle to meet key Basel III liquidity ratio requirements, and therein find it difficult to raise funds.

Finer detail in the report states investment banks would be barred from setting up their own retail deposit business, and therefore may have to consider other forms of deposit to fund the provision of commercial credit lines.

Meanwhile, the ICB estimates that the implicit subsidy to large banks as a result of the Government’s bail-out guarantee is worth more than £10 billion a year.

Naturally there are no cash transfers from taxpayers; however, banks are able to borrow at a lower cost and therefore have an incentive to take more risk.

The ICB wants Lloyds, which was a chief recipient of bailout funds, to sell more branches than the 600 previously agreed under the previous Government – yet  it doesn’t state how many.

The head of Lloyds was quick to criticise the call.

The singling out of Lloyds was part of the report’s focus on raising competition levels in the sector, as it also called for greater portability of retail bank accounts between providers, in a similar vein to the steep rise in competition within the telecommunications sector once people were allowed to transfer mobile phone numbers to other providers.

The ICB is right in its observation that elevated levels of regulation and capital requirements act as barriers to entry into the sector.

However in the present voter ‘banks are evil’ mindset and with the Government holding significant assets in the sector as a result of the bailouts, there is unlikely to be any relaxing of either of the above in the foreseeable future.

It might be a while therefore before the competition and new business models emerge in the UK banking sector.