UK banks prepare for inevitable shake-up- sources

(Reuters) - Britain's top banks have begun preparing for a major shake-up ahead of a government decision, sources with knowledge of the matter said, in an attempt to reassure investors that they can handle expected changes to the way they operate.

The "Big Four" banks - Barclays , HSBC and part-nationalised lenders Lloyds and Royal Bank of Scotland - have stepped up lobbying against excessive new regulation in the run-up to The Independent Commission on Banking's (ICB) final report on Sept. 12.

But analysts say banks have accepted that moves to make them ring-fence retail operations from riskier investment banking activities and hold more capital appear inevitable -- even if the government does not implement the ICB's expected recommendations for several years.

"Typically what will happen is that banks will work out what timeline they need to hit to appease investor and market confidence, and so they may well implement a plan ahead of an official schedule," said Ajay Rawal, senior director Alvarez & Marsal, which specialises in bank restructurings.

The banks have begun preparing for how to deal with ring-fencing their main retail operations rather than hope for the government to delay the reforms, sources told Reuters.

"Work is already under way, based on what we know and what we expect. The banks have already started preparation for what is required," a source at one of Britain's top four banks said on Thursday.

Another source at a second top-four British bank said companies had been analysing various scenarios after the government-appointed ICB first suggested the ring-fencing option in April.

"There is not much you can do until we know for sure what is contained in the ring-fence but clearly people have thought of how it may work and what it may look like," said the source.

Brokerage Seymour Pierce estimates that Barclays and RBS would be hit the hardest by a ring-fencing model, partly because of their large investment banking operations, adding that the industry could not escape from an eventual restructuring.

"The banking system has been on life support and opiates since 2007. There must come a time for the patient to undergo surgery and physiotherapy, in our view," it added.

The ICB is expected to back proposals made in an interim report, when it said UK banks should ring-fence their retail operations from riskier investment banking activities to protect taxpayers from future financial crises.

However, the precise details of how this would work and the time frame given to banks to implement it remain unknown and a topic for political wrangling in Britain.

Shares in Britain's beaten-down bank stocks rose sharply on Thursday on hopes that major new reforms may be delayed. RBS, Barclays and Lloyds all rose by between 5 and 7 percent. The sector has fallen by some 20 percent this year.