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LONDON, Sept 1 (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. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Q+A-UK banks reform looms with ICB shake-up INSIGHT-UK's City watchdog set to bite ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Britain set up the ICB after its banks got badly burnt during the 2007-2008 credit crisis.
The government had to fully nationalise Northern Rock and ended up with stakes of 83 percent in RBS and 41 percent in Lloyds after having to rescue RBS and Lloyds with billions of pounds of taxpayers' money.
After the final ICB report is issued, it will be up to the government -- through a Cabinet committee on banking chaired by finance minister George Osborne -- to choose what to implement into law, probably starting later this year or early in 2012.
Banks could have years to bring in the reforms, perhaps until 2019 for full implementation, after recent financial market turmoil and a deepening euro zone debt crisis raised fears about the impact of quicker change.
The ICB is also expected to ask banks to hold more capital by targeting a core Tier 1 capital ratio of 10 percent for top UK lenders, and Britain would not want this to be out of sync with the 2013 introduction of tougher global bank capital and liquidity standards, known as Basel III.
British media reports this week said reforms had stalled in the wake of the banks' intense lobbying campaign, and that any major new reforms may not be implemented until after the planned 2015 general election. (Additional reporting by Sarah White and David Brett; Editing by Erica Billingham)