Not many investors see Britain's banks as a wise place to invest and some see it as a dumb place to put capital at present, the head of majority state-owned lender Royal Bank of Scotland said.

RBS Chief Executive Stephen Hester also said Wednesday that comments by a Bank of England policymaker earlier this week that banks could raise more capital were surprising.

I would be interested to see the investor who wants to put more capital towards UK banks at the moment. They are thinking it is a dumb place to put more capital, he told lawmakers on parliament's Treasury Select Committee.

Hester was responding to comments by the Bank's Robert Jenkins that banks were lobbying too hard to convince the public and politicians that tougher rules would hit economic recovery, and that they could beef up capital by reducing bonuses, cutting risk-taking, or raising debt and equity.

HSBC chairman Douglas Flint said financial markets were in dangerous times and investors had limited visibility on structure, regulations and returns.

Flint and Hester said regulatory reforms proposed by Britain's Independent Commission on Banking (ICB) to make banks safer could be more costly than expected.

Flint said the cost of issuing bonds that could absorb losses would be about $2.1 billion (1.3 billion pounds) a year for his bank, which was too high to ignore under its assessment of whether to keep its headquarters in London.

It's perverse that a business model that is conservative in terms of liquidity and capital would be disadvantaged by a mechanism that's designed to strengthen the system, he said of the reform proposal.

Earlier this month, HSBC said new banking regulations could cost it $2.5 billion a year -- including a bank levy -- possibly making it too expensive to stay in London.

He said if the bank relocated it would choose a place where it already had a significant presence.

The ICB's estimate that the reforms will cost the industry up to 7 billion pounds were likely to be too low, RBS's Hester said.

He declined to estimate the cost for RBS, but said implementation would cost it between 500 million and 1 billion pounds and there would be higher funding costs and for holding extra capital.

The reforms will require UK firms to ring-fence retail banks from investment banking activities and make banks hold more capital.

The Treasury is prepared to water down the ICB's recommendations and drop its suggestion that retail depositors should be paid back before all other creditors, business newspaper City AM reported.

(Editing by Jane Merriman and Helen Massy-Beresford)