Last week it emerged that state-controlled Royal Bank of Scotland was planning to cut 14,000 of the 18,000 jobs in its investment bank. On the same day, Barclays promised to increase its own cull if performance did not improve.

It felt like a moment.

Once ambitious to compete with leaders in the sector, the two UK groups have taken a hatchet to their investment banks, with regulators demanding less risky business models after the 2007-09 financial crisis.

Retrenchment is set to go further, and the UK may be left with no homegrown investment bank of scale. RBS’s 4,000-strong investment banking workforce will make it a minnow. Barclays, which has 20,000 in its investment bank, and HSBC, with a similar number, are dwarfed by the likes of JPMorgan (51,000) and Deutsche Bank (37,000).

Does it matter? Policy makers have long argued that the demise of UK investment banks would be inconsequential, invoking the Wimbledon model: as long as the best players are drawn to London, it is no matter that none is British.

For the City of London as a whole and for big corporate clients that might be true, but smaller customers may feel the fallout, Peter Hahn, a senior fellow at Cass Business School, says.

“People have started to say how wrong the Wimbledon model is,” he says. “For the mid-market companies, not having British investment banks is a real loss.”

Medium-sized companies, which UK policy makers hope will some day be comparable to the Mittelstand, the backbone of Germany’s economy, use investment banks for advice, products such as rate hedging and foreign exchange, and capital markets access.

Paco Ybarra, global head of markets and securities services at Citigroup, says: “The question is really one for mid-market companies that grow and start to export and look to expand internationally. They would have to convince foreign banks that don’t know them to begin dealing with them.

“It is much easier for a bank that has already been dealing with a mid-market company domestically to transition to a full-service international banking relationship.”

Matthew Fell, director of competitive markets at the CBI, the UK employers’ organisation, says foreign banks are not as likely to be good providers of those services to SMEs as they expand.

“Continuity of relationship is important,” he says. “That’s more likely to come as they grow out of their existing banking relationship, which tends to be UK.”

Mr Fell points to a Team GB element for UK companies going overseas, where they can reap benefits from partnering a strong domestic bank.

The banks play down the dangers.

RBS says its smaller investment bank will still be able to serve the needs of UK clients. Barclays has not identified how the extra cuts hinted at last week would be made. Some of the global investment banks, which have traditionally shunned SMEs, are making efforts, for instance Goldman Sachs’ “10,000 small businesses” project that banks high-potential smaller UK companies.

Still, the banks that dominate the City skyline remain overwhelmingly focused on larger multinational clients.

In that group, not many tears are being shed over the threatened demise of UK investment banking.

“RBS was just falling apart,” says one FTSE 100 chief executive. “There was not much business left really.” As for Barclays, it was making “a pragmatic decision to concentrate on businesses that it can really do well”.

One bright spot is that HSBC, which has traditionally focused on its Asian heartland, has made a push into UK investment banking of late. Another FTSE 100 boss says his first reaction was that the decline of UK investment banking “doesn’t matter, because when we think of the people we use, we never really think of who owns them”.

Investment bank employee numbers

Companies in France and Germany like to bank with their domestic champions. In the UK, a chief executive at a FTSE 250 company says there is no Britishness being lost — “Britain is an emotional concept, not a commercial one”.

Richard Woolhouse, chief economist of the British Bankers’ Association, the lobby group, says: “The important thing is that we maintain a vibrant investment banking market in London. In extremis, if you had a breakdown of global relations and lots of wars breaking out, the story might be different. In the context of the globalised world it shouldn’t matter that much. It’s the activity that matters.”

Clients may find that a tighter competitive landscape leads to higher prices, but many bankers play that down, too.

“When [rivals] pull back, there are opportunities, and the reduction in capacity in theory helps [push up prices],” one senior US banker says. “However, in this regulatory environment, much of the business [that RBS and Barclays] will stop is business that needs to be stopped anyway.”

If the negative hit to clients is questionable, the positive short-term impact for shareholders is clearer. Investors have seen billions of dollars of value destroyed across the investment banking sector, from toxic trading positions and large fines for serious misconduct.

“Shutting down the investment banking operations will reduce the volatility in earnings,” Alem Husain, analyst with SNL, says. Barclays’ investment bank delivered a return on equity of less than 3 per cent last year, well short of its 12 per cent target.

RBS’s investment banking cull was welcomed by analysts.

At least until the good times return, few will bemoan the vanishing British investment bank.

Additional reporting by Martin Arnold

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Letters in response to this report:

How UK banks’ empathy with the wealth-creating economy was lost / From Jeremy Mallin

UK’s talent pool is about to get wider / From Hugh Stewart

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