U.K. banks are likely to keep their retail and investment banking operations under one roof despite some initial signals from the Bank of England for them to split up those operations, industry players and analysts said Thursday.

If anything, U.K. banks will likely pursue growth by using the universal model of having elements of commercial, retail and investment banking, these people said, citing cost advantages and the fact that most U.K. banks are better capitalized than at the height of the financial crisis.

The British Bankers' Association, meanwhile, warned that adding too many new requirements on banks would curtail their businesses at a time when more lending needs to be done.

Their comments came after a speech Wednesday by BOE Governor Mervyn King, who - while calling for tighter banking regulation - said: "It is not sensible to allow large banks to combine high-street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure."

In the years leading up to the current financial crisis, many deposit-taking banks acquired or developed much riskier investment banking businesses, exposing taxpayers to huge costs when they ran into trouble.

A number of governments around the world, including the U.K., increased their national guarantees to cover retail deposits in the wake of the collapse of Lehman Brothers Holdings Inc. (LEH) in mid-September when public concern about bank safety was at its height.

King said he believes that either the retail and investment banks should be separated, or banks that combine both functions should have to be better capitalized than retail banks.

"Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements," he said.

King's comments came on the eve of a European Union summit Thursday to discuss a proposal for tighter financial rules. The U.K. is resistant to pan-European regulators supervising individual banks and other financial-system players, even though other countries have called for a stronger E.U.-wide authority in dealing with the crisis.

Panmure Gordon said that the obvious "read-across" (from King's speech) is into Barclays PLC (BCS). Panmure noted Barclays Capital's aim to be among the top three investment banks in the world. "The question, of course, is how much capital achieving that ambition will require," Chen said.

Barclays spokesman Alistair Smith said Barclays has stated previously that it wants to strengthen its capital. Without commenting specifically on King's speech, Smith referred to an analyst briefing Wednesday with senior Barclays executives who said universal banking is a must for the bank.

In that briefing, held before King's speech, Barclays President Robert Diamond said that "(Chief Executive) John Varley's vision for Barclays, which has been very clear for a number of years, is the universal banking model."

Diamond said the bank gets "synergies" and becomes more efficient with its resources under the universal banking model.

"So you know ... we recognize that one plus one can equal three. And there is no change in emphasis on any of that. It is the universal banking model that allows us to get to those synergies," Diamond said.

Varley said that he expects Barclays' global, retail and commercial banking - or GRCB - business to "continue to grow quickly" and that "there is no de-emphasis at all" on the GRCB business after the bank bought parts of Lehman Brothers' North American investment banking operations.

A spokesman for HSBC Holdings PLC (HSBA.LN), another big U.K. bank that uses the universal model, didn't comment on King's speech but pointed out that HSBC has said previously that there may be a case for higher capital levels in certain riskier elements of trading businesses.

One London analyst said that "the universal model is the model to have."

"Retail banking and investment banking have become complementary," he said. "What King is stressing is just to de-risk the investment side through added capital. But he's been saying that for the past six months, and I think the banks are already well-capitalized, so I don't think any U.K. bank would need to raise more capital soon."

BBA Chief Executive Angela Knight said: "Right now, banks in the U.K. are holding twice as much capital as they did before the credit crunch. If new requirements are piled on too high, then the banks simply will not be able to support the sort of lending that business and individuals require."

"To curtail the activities of British banks, while our international competitors can continue to provide all these services, would be a very poor decision for the U.K. economy. These services underpin the requirements of their individual customers and are vital for corporate Britain," Knight said.

Knight called on the government to "strike a balance between the desire for financial stability and the need to finance the economies out of the recession."

"There is a strongly held view within our membership that more attention needs to be paid to the fundamental question: What is the right amount of capital in the system?" she said.

"We therefore need to know far more about how much additional regulatory changes will cost, what the impact is and then decide how to phase them in so that growth is not constrained as a result," Knight said.

Company Web site: www.bankofengland.co.uk

www.barclays.com 
www.bba.org.uk

-By Vladimir Guevarra, Dow Jones Newswires. Tel. +44 (0) 2078429486, vladimir.guevarra@dowjones.com