Let me be crystal clear, Barclays' star investment banker and new Chief Executive Bob Diamond told members of the British parliament in January. We are going to be here in the United Kingdom, and this is the place that we want to succeed.

It may be a reflection of how bankers still struggle to be taken at their word in the wake of the global financial crisis, but Diamond's statement convinced nobody. Rumors that Barclays and its bigger rival HSBC are ready to move their headquarters to Hong Kong or New York have flourished ever since.

Speculation has intensified in the run-up to the April 11 publication of an interim report into the future of British financial services by the Independent Commission on Banking (ICB). The banks fear it will recommend costly reforms. A public admission by Diamond last week that he had an obligation on behalf of shareholders to look at alternative tax bases, and repeated warnings from senior city figures about the consequences of a high-profile defection, are seen as thinly veiled attempts to influence the commission's thinking.

But research by Reuters shows the commission should be in a strong position to counter such threats, since the impact of any big bank departures on the economy, government finances and the City of London's pre-eminence as a financial center would be extremely limited. In a crucial year for global finance, as the regulatory landscape is substantially redrawn, this may embolden the committee. That in turn would help the Conservative-led UK government strike the balance it needs between sounding tough on an industry whose excesses anger the public, and appeasing some of the Conservatives' top donors.

In any case, the banks' threats to quit the UK may prove overblown, says Andrea Leadsom, a Conservative member of parliament's influential Treasury Select Committee: I think it's unlikely -- I'd say no better than evens -- that any one bank will move offshore, and if they do move what that means for tax take will depend on the bank involved but is likely to be fairly limited.

Leadsom, a former senior executive at Barclays and one of those who grilled American-born Diamond during January's testimony, says senior bankers often tell her the government is on the verge of driving them away, but she is not impressed.

I'm not an advocate of ever tighter regulation, she told Reuters. What we need is clever regulation. But I don't think it's as simple as saying 'if you keep annoying us we'll just leave'. I think that's a nonsense argument.

And even if some do leave, asks Leadsom, so what? One or two of them might change their corporate headquarters for tax purposes but if they do go we probably won't even notice. There won't be a great outflow of workers and Canary Wharf won't turn into a ghost town.

Some supporters of reform, including a few within the Bank of England, go further, suggesting that the banks' departure might even be desirable given HSBC's $2.5 trillion balance sheet alone is bigger than the entire British economy. Even though HSBC has come through the global financial crisis relatively unscathed, that puts the bank firmly in the too big to fail bracket -- in a crisis, it would have to be bailed out, which may encourage risk-taking.

TAX HAVEN BRITAIN?

Banks have long been huge wealth generators for Britain. Most of that, though, comes from the dividends banks dole out, the jobs they create and the income tax their staff pay -- and not from corporation tax.

That undercuts bank complaints about government treatment.

When Oswald Gruebel, chief executive of Swiss bank UBS, launched a broadside against the British government last month, accusing it of neglecting the banks, he noted that his bank alone employed some 7,000 people in London. The government is so quiet about (the City), Gruebel told the Financial Times. Only behind closed doors do they pay lip service to wanting to keep the City. If it is abandoned by the government one day, God help you.

But UBS' annual report for 2010 shows how tax advantages in London mean it and other banks that have made huge losses have a vested interest in staying in the UK where -- unlike the United States and Switzerland -- they can offset losses against tax indefinitely. Swiss tax losses can generally be carried forward for seven years, U.S. federal tax losses for 20 years, but in the UK or Jersey, there is no time limit.

The English language version of UBS's annual report shows in some detail how it hopes to be able to offset up to 51 billion Swiss francs ($56 billion) in accrued losses against tax globally in the coming years. While it does not specify how much of these the British taxpayer can expect to absorb, the tables do reveal that some 11 billion Swiss francs worth fall into the no-expiry bracket offered by the UK. A further 37 billion francs are due to expire in the next 11 to 20 years -- beyond typical Swiss limits but in line with U.S. allowances.

The ability to offset historical losses is incredibly helpful to any company. Any corporation tax paid by UBS last year was more than offset by past losses, meaning that across the group it recorded a net income tax gain of 381 million Swiss francs. Unusually, it also posted a bigger net profit than its operating pretax profit. On this scale, the offset starts to make a new levy on banks by the UK government -- which has raised heckles in the city and which UBS has said will cost it 75-100 million Swiss Francs a year -- look like small change.

Asked whether UBS had paid any corporation tax in the UK in 2010 or expected to do so in the coming years, a spokesman for the bank said it did not disclose information on tax paid in specific countries. At the same time, the UK government is making it more attractive to be based in London by cutting corporation tax to 26 percent from 28 percent and planning a further fall to 23 percent by 2014, which would be the lowest rate in the G7. It has also moved to allay fears -- a legacy of the previous government -- that companies' overseas earnings may lose tax-exempt status.

The lower corporation tax rate in the UK and the move to exemption (on foreign income) should increase the desirability of the UK as a base, says Helen Miller, Senior Research Economist at the Institute for Fiscal Studies. The U.S. has a higher statutory rate of corporation tax and it taxes global earnings, which sounds on the face of it less attractive, although there are many other reasons why companies might choose to base themselves in the United States.

The United States manages to retain a competitive edge, for instance, because firms can avoid some tax on worldwide income by not sending it home.

THE CORPORATION OR ITS EMPLOYEES?

The sheer complexity of the global tax system is another disincentive to making a big move, a fact the ICB will consider in its recommendations. Another important factor: how little the banks currently contribute directly to the exchequer in relative terms, and how little that is likely to change as a result of any defections.

HSBC, which unlike rivals publishes detailed breakdowns of its tax bill including actual figures, says it paid $750 million in corporation tax in the UK last year -- much more than many of its rivals but still a fraction of its $6 billion dividend payment.

To put that in perspective, it equates to 0.08 percent of the British government's total estimated receipts for the coming year or 13 percent of the total tax paid by the bank globally last year. HSBC's best-paid 280 staff alone received about $472 million in cash and shares for 2010.

More importantly though, HSBC will continue to pay corporation tax on its UK operations no matter where it is based. Hong Kong may not boast HSBC's headquarters but it collected $962 million in tax on profits from the bank last year -- almost 30 percent more than HSBC paid to the UK in corporate tax.

None of which is to argue that the banking system is not important to the British economy. The British Bankers' Association estimates its members contribute about 50 billion pounds a year to the UK economy, while Barclays boasted in its 2010 annual report that the banking sector employs nearly 500,000 people in Britain.

In terms of taxes alone, Commercial Secretary to the Treasury and former banker James Sassoon told members of the House of Lords in February that large banking groups were expected to contribute around 20 billion pounds ($30 billion) in tax for the 2010-11 tax year.

Crucially, though, that figure includes indirect contributions such as income tax paid by bank employees. Of his 20 billion pound tax-take figure, Sassoon says the proportion contributed by pay-as-you-earn income tax and other social contributions is 80 percent, with corporation tax making up the remaining 20 percent.

Then there's the argument that no one financial institution is, or should be, indispensable in a country where the Financial Services Authority regulates some 29,000 companies, which between them employ over a million people. When you see figures about how much the City contributes in tax, they lump the banks in with lots of other firms. Banks are only a small component of that, so when you talk about the banks leaving, there's not going to be this enormous outflow of revenues, says Lydia Prieg, a researcher at the left-leaning New Economics Foundation think tank who previously worked on the trading floor at Goldman Sachs.

Even if a bank leaves, it is unlikely to take all its staff with it. HSBC employs more people in the UK than it does in any other single market -- almost as many as in Hong Kong and the United States combined. A lot of those jobs are likely to stay no matter where the bank is based.

That was certainly the experience of the world's biggest advertising agency WPP when it shifted its tax base to a Georgian townhouse in a street just off Dublin's St Stephen's Green in 2008. Out of a global workforce of 138,000, WPP only ever moved a handful of people to Ireland before deciding last month -- prompted by the latest tax changes -- to move back to London.

There's also the issue of shareholders. Four of the top five biggest shareholders in HSBC, for instance, are venerable British asset managers. Indeed, about 40 percent of the $6 billion in dividends that the bank is due to pay for 2010 will go to UK pension funds and shareholders. Combined, the top eight shareholders alone will make more in the dividend payout than the UK taxman gets in corporation tax. Those dividends will keep rolling in wherever HSBC is based.

It's a similar story with other banks.

Barclays declined to provide details of how much corporation tax it paid in Britain in 2010 but its annual report shows it had a worldwide tax charge of 1.5 billion pounds, which equates to less than 13 percent of its 12 billion pounds in staff costs, most of which are salaries and pension or social security contributions.

In February, in response to questions from parliament's Treasury Select Committee, the bank revealed that it paid 113 million pounds in corporation tax to the UK in 2009 -- 1 percent of its global pre-tax profit that year, and less than a quarter of the 504 million pounds in remuneration and deferred incentives handed out to Barclays' top bankers in 2010.

And while much is made of the fact that Barclays' investment bank is now bigger than its UK retail operation, Britain still accounted for 40 percent of its total income in 2010, against 25 percent from the Americas. For all its readiness to import star bankers and investors, Barclays remains about as British as strawberries and cream at Wimbledon on a summer's day. Almost half of its loans are made in Britain and about 60,000 of its 147,500 staff are in the UK. Last year 80 percent of the 2,000 new jobs created by the bank were in the UK -- hardly a sign of an impending exodus.

The least British of the major London-based banks is Standard Chartered, which does most of its business in Asia and Africa. Just nine percent of its $16 billion 2010 operating income came from Britain, Europe and the Americas last year. But it too is a great illustration of how institutions tend to pay the lion's share of corporation tax in the jurisdictions where the money is earned rather in their home base.

The bank's nominal UK tax bill for 2010 was $871 million, but some $697 million of that was clawed back in the form of double taxation relief which prevents the same income being taxed twice in two different jurisdictions. In the end it paid $174 million in UK corporation tax, or 13 percent of its foreign tax bill and 10 percent of its total global tax bill -- broadly in line with the proportion of income generated in the UK. That would be unlikely to change even if Standard Chartered shifted to a new base.

A VERY BRITISH AFFAIR

None of that makes a bank move from London impossible, of course. But it is worth bearing in mind when confronted with clamorous headlines about how the government might force the banks to quit Britain.

There's been a lot in the press about big companies moving offshore but there haven't been that many. There hasn't been a mass exodus, says Miller at the Institute for Fiscal Studies.

David Gauke, Exchequer Secretary to the Treasury, told parliament last month that research by tax officials indicated 22 companies had left Britain for tax reasons over the last four years.

One of the reasons for that may be the lure of London itself. The latest edition of the Z/Yen Global Financial Centers Index published last month -- which London has topped ever since the survey's inception in 2007 -- showed the British capital remained top choice among financial services professionals, although New York and Hong Kong were not far behind. London is an extraordinarily attractive place for bankers to live, says MP Leadsom, even if high-earners have been hit with more income tax. English-speaking, and located in a time zone between the booming markets of Asia and the world's biggest economy across the Atlantic, London also boasts good schools, luxury houses, and world-class restaurants.

It's effectively the capital of the developed world, she says. We speak the international language of business here.

In his appearance before parliamentarians earlier this year, Barclays' Diamond tried to capture the reasons why, for the moment at least, British is best. Over time there has been no city in the world that has benefited more or been more supportive of foreign trade and flows of business in and out of the city than London. So London has become a place that is recognized as very good for business and very good for talent, he told MPs. People have enjoyed living here, but it has been much more about companies feeling that this is good for business, it's good for raising capital and it's good for attracting talent.

PR POWERHOUSES

So why all the complaints about increased regulation in London?

The truth is that banks everywhere are lobbying hard to limit new regulation. Threats to move are just one weapon in their armory, even if any change of corporate headquarters is unlikely while such uncertainty reins.

Regular readers of German business papers will know that Deutsche Bank has often touted a move to London. Investment banks in the United States complain that they are at a competitive disadvantage to their rivals in Europe. Some argue that the Volcker Rule, which forces U.S. banks to exit profitable trading ventures where they used the firms' own money, could have an even more dramatic effect on their businesses than Europe's crackdown on pay.

JPMorgan boss Jamie Dimon told the U.S. Chamber of Commerce last month that new, higher capital requirements designed to protect banks from collapse would greatly diminish growth and risked putting the nail in our coffin for big American banks. Former Federal Reserve Chairman Alan Greenspan recently wrote in the Financial Times that Wall Street reform under the Dodd-Frank Act may create the largest regulatory-induced market distortion since America's ill-fated imposition of wage and price controls in 1971.

Standard Chartered Chief Executive Peter Sands wrote in his review of the bank's 2010 performance that the biggest problem was the lack of predictability. Rather than seeing increasing global co-ordination and consistency of regulation, we are seeing increased fragmentation and unilateral action. Barclays' 2010 accounts flag greater regulatory related costs as a principal reason for rising administration expenses, but also show that the bank would need to carefully weigh up regulatory risks elsewhere before shifting bases.

The bank paid $298 million last year to settle charges that it violated U.S. trade sanctions -- double the 96 million pound charge it took as part of its bill covering the cost of a 50 percent payroll tax slapped on bonuses by the UK government.

The PR skills of the banks as they lobby to limit the damage from perceived over-regulation were not lost on the Bank of England's Executive Director for Financial Stability Andy Haldane when he argued in late 2009 that there was not so much as a scintilla of evidence of bigger being better in banking.

It's true that the lobbying effort of the financial sector should not be underestimated, he told the BBC. Equally, the way to beat that back is by appealing to logic and to evidence.

PRICE WORTH PAYING?

And yet. Jon Terry, head of reward at PricewaterhouseCoopers, reflects the fears of many in London's financial services community when he warns of the reputational damage to the City caused by any high-profile departure and of the long-term, indirect consequences of tax and regulation policy changes.

The biggest issue for me is what it means for the future and stability, Terry said. We're already seeing a number of large banking organisations, particularly overseas banks operating very large businesses in the UK, saying 'we are not going to expand that part of the business in the UK -- it's going to go somewhere else'.

Chris Wheeler, banking analyst at Mediobanca, said the immediate impact of a withdrawal from London may be small, if embarrassing, but the risk was that it would grow.

The odds are probably on them staying, but we'll see what comes out ... in case there's something there that's so toxic it makes life difficult, he said. If Barclays or HSBC pulled the plug there would be major prestige issues, lost taxations and all the add-on services.

There is no sign that major investors are yet actively agitating for moves abroad but they are watching closely.

All investors want is that everyone has the same rules. But if the UK is out of line, then that's a problem, said one of HSBC's top 10 shareholders, who spoke on condition of anonymity and pointed to HSBC, Barclays and Standard Chartered as the most likely to shift. Most of the banks want to stay -- none of them want to leave but if it was clear their valuation was going to be significantly different in another jurisdiction, they would go. It wouldn't take too much.

Those outside the City argue that regulators should not be shy about setting the bar high if it means taxpayers feel their banking system is safer. Hundreds of millions of pounds in lost tax revenue may turn out to be small price to pay for offloading trillions of pounds in bank liabilities.

As long as we continue to have institutions that are so big that they can bring down the rest of the economy, there will always be an implicit taxpayer subsidy and these banks will be able to borrow at interest rates much lower than they would in a competitive market, says New Economics Foundation's Prieg.

The British public has shown its capacity (if not its enthusiasm) for bailing out major financial institutions. But any new host to HSBC would have to be ready to act as lender of last resort to an institution with a balance sheet bigger than all but the world's five largest economies.

The Bank of England's Haldane has argued that Britain might do well to offload some of the risk inherent in such banking behemoths. Some of the downsides of carrying around a big financial system are now evident to all, he told the BBC. If some of that were to migrate overseas that would be unfortunate but given the costs of carrying that financial system around, it may be a price worth paying.

(Reporting and writing by Paul Hoskins; Additional reporting by Steve Slater, Myles Neligan, Sinead Cruise and Kirstin Ridley in London; Editing by Simon Robinson and Sara Ledwith)

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