Rachel Reeves, the Chancellor, has indicated to leading bank executives that she is "open-minded" about abandoning the ring-fencing regime imposed on major banks.

Last month, the heads of HSBC, Lloyds, Natwest and Santander lobbied the Chancellor to abolish the 15 year old legislation, as reported by .

The lenders criticised the system, which mandates firms to separate their retail banking operations from their investment banking, as "redundant" and a hindrance to the firm's "ability to support business and the economy" in a letter sent to Reeves in April.

Reeves has since responded: "Officials are considering the issues" and suggested further discussions.

In a letter obtained by Sky News, Reeves wrote: "Banking is at the heart of the º£½ÇÊÓÆµ's financial services sector and plays a vital role in supporting growth across the º£½ÇÊÓÆµ economy and will be crucial to the success of the government's industrial strategy."

City AM reported last week that Natwest and Lloyds could receive a significant financial boost if Reeves were to meet the lenders' demands.

Full list of 60 Lloyds Bank, Bank of Scotland and Halifax branch closures in º£½ÇÊÓÆµ
Lloyds Bank

RBC analysts have projected a "blue sky" scenario that would see the banking sector benefit by around £2.5bn. In a base case, savings exceed £1.5bn, with Natwest emerging as the biggest beneficiary.

Natwest could see a £530m boost, "due to the larger funding cost gap between the ring-fenced back and non-ring-fenced back", according to analysts Benjamin Toms, Anke Reingen and Pablo de la Torre Cuevas.

This figure represents seven per cent of Natwest's projected pre-tax profit for 2026.

Analysts have stated that HSBC and Barclays would "benefit, but to a lesser degree."

Barclays could save £240m and HSBC £300m.

Barclays' boss: Ring-fencing should not be scrapped

However, in contrast to his FTSE 100 counterparts, Barclays boss CS Venkatakrishnan staunchly defended ring-fencing in April.

The bank's chief doesn't believe the regulation "should be relaxed or scrapped."

He argued: "There are two counterpoints: we have spent the money on the set-up and we make it work; but the more important fact is that you have to weigh against this the immense amount of depositor protection that the ring-fencing regime gives the country."

This regime originated from the financial crisis, where regulators saw the need to separate a bank's everyday services, like taking deposits and offering loans, from its riskier investment activities, such as trading.

It was mandated in the Financial Services Act 2013 and created a legal 'firewall' around retail banking to ensure savings and access to banking services were protected if other parts of the lender failed.

º£½ÇÊÓÆµ banks with more than £25bn in core deposits are required to ring-fence their retail operations from riskier activities.

Like this story? Why not sign up to get the latest business news straight to your inbox.