Britain big banks made "constant threats" to flee the UK if the government forced them to split high street divisions from their casino banking arms.
Martin Taylor, a former chief executive of Barclays and a member of the government-commission review of the banking industry, told MPs that the nations' big banks repeatedly threatened "to leave the country if they didn't like what we came up with".
Taylor, who ran Barclays between 1994-8, said ringfencing high street from investment banking would provide as much consumer protection in the event of another financial crisis without risking an exodus of the banks.
"Had we mandated the full split I think one or two banks could reasonably have asked themselves whether they would want to move," he told the parliament commission on banking. "A ringfenced bank would be as easy to supervise as a separated retail and commercial bank."
Taylor said that keeping both parts of a bank within a group structure would also enable the investment banking arm to rescue the high street division if it got into financial difficulties. "Retail banks go bust as frequently as investment banks... if you have a full split you remove the possibility [that the investment banking division could save the high street banking arm]."
However, Lord Lawson, a former chancellor who is sitting on the parliamentary commission on banking standards, said there were "huge risks" that a ringfence could be permeated over time.
"Some of us find it difficult to conceive how there can be two diametrically opposed cultures within one and the same institution and with, incidentally, one and the same group of shareholders," Lawson said.
Taylor said he would fully support enforcing a split in the future if the proposed ringfencing arrangements failed. "If you give the regulators the powers that the draft bill foresees, you would have some pretty strong defences. But defences need keeping up," he said.
George Osborne, the chancellor, accepted the majority of the Sir John Vickers' independent commission on banking report's proposals, but watered down recommendations on how much capital lenders must hold. Taylor said the relaxation of Vicker's proposed 4% capital buffer requirements was a "big mistake".
"I understand why the government is not keen to do it as there is an international argument at the moment. People are struggling to hold the line at 3% with Basel III meaning organisations can be 33 times geared. I think we are making a big mistake," he said.
Earlier this month Paul Volcker, a former head of the US central bank and an adviser to president Obama, told the inquiry that the ringfencing plan was doomed to failure. He said ringfecning would encourage bosses to seek loopholes to take bigger risks.
"When you adopt a ringfence, pressures from inside the organisation tends to weaken the restrictions," Volker said. "I'm not saying it will be totally ineffective, but the Vickers report says it is going to have a ringfence with exceptions, and once you go down that road of having exceptions the [banking] organisation is going to push for more exceptions and widen the limits."
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