The major European lenders have warned they might have to relocate thousands of people out of Britain, should the Brexit negotiations force them to convert their UK branches into subsidiaries.

Three of the main European banks, Societe Generale, BNP Paribas and Deutsche Bank, currently operate their business in Britain through a branch structure, which demands low capital requirements.

The arrangement has worked smoothly so far but once Britain leaves the EU, UK regulators are expected to demand higher capital requirements, in a bid to ensure the British taxpayers are not left footing the bill in the event of a crisis.

Britain's banking regulator has already indicated European banks should have contingency plans in place, which would see them set up subsidiaries in Britain and follow regulations set out by the Bank of England (BoE), should the UK and the EU fail to reach a Brexit deal.

The new capital demands for European banks, which could amount to €40bn (£33.7bn), could accelerate the process of European bankers moving away from London, which currently hosts the bulk of many European banks' investment activities.

"If [BoE Governor Mark] Carney decides to make EU banks create subsidiaries [...] I will buy a one-way train ticket out of London and take everyone with me," one senior executive at a European bank was quoted as saying by Reuters.

A senior executive at another European bank added his organisation "would have to reassess our options here in London in that case," should it be asked to set up a subsidiary.

"In the US, the Federal Reserve takes a lot more ownership over branch structures, it's a lot more intrusive. It's therefore natural for the PRA (Prudential Regulatory Authority) to become more intrusive. Maybe they would have to force more supervision."

However, a number of European lenders remain hopeful of continuing their operations in Britain with minimal disruption.

"We hope it's a warning and that it will not translate into anything," a senior executive at an EU banking lobby was quoted as saying.

"The transformation to a subsidiary has a lot of consequences, on the liquidity side, capital.

"It will create more costs for banks. We are sure that London will remain an important financial market and it (requirements to set up subsidiary) will not probably lead banks to leave London. But it's not an incentive to expand business there."

Passporting issue

While Brexit should be complete within two years, the future of Britain's economic ties with the EU remains clouded in uncertainty.

Upon triggering Article 50 in March to begin the formal process of taking Britain out of the EU, Prime Minister Theresa May confirmed the UK would "not seek membership of the single market" when negotiations begin.

Leaving the single market will mean lenders will not retain access to the European banking passport system, which allows banks and other financial institutions authorised to operate in an EU country, or a state member of the European Economic Area (EEA), to conduct business across the union.

That has prompted a number of US and European banks to draw up plans to relocate some of their operations away from Britain.

Last month, Deutsche Bank, which employs 9,000 people in Britain, said that Brexit could force the bank to move around 4,000 jobs from the UK to EU member countries. Goldman Sachs' s chief executive Lloyd Blankfein last week warned that the firm has to plan for "a number of contingencies" based on the UK's access to the EU single market after Brexit.

It is not just European and US banks which could move operations out of the UK either, as Barclays' CEO Jes Staley said UK banks will begin the process of moving some operations to Europe fairly soon, in order to avoid any major post-Brexit disruption.

Last month, Staley said lenders were likely to struggle to get the complete picture of Britain's trading terms with the other 27 EU members in time to safeguard their links with the customer on the continent.

"You will start to see movement in a reasonably short period of time," Staley said. The Barclays CEO also added that the process of changing financial contracts to a different jurisdiction and obtaining a licence to operate in continental Europe could both take up to 18 months.

At the end of last year, Carney said Britain remained the "investment banker for Europe", as he urged European leaders to push for a smooth Brexit given the role Britain played at the heart of the region's financial landscape.

The BoE governor called for Britain and the EU to reach a deal to recognise their respective banking rules after Brexit, in a bid to avoid a potentially damaging blow to the financial services sector in both regions.

The issue with the sort of arrangement Carney hopes to see implemented is that it has never been tried on such an enormous scale, which could make negotiations even more complicated.