LONDON (Reuters) - Banks would face tough new measures that could hit their profits, although the reforms could take years to implement, under proposals to be finalised in a key government-sponsored report on Monday.
The final report from the Independent Commission on Banking was expected to back protecting ordinary savers and customers by ring-fencing banks' retail divisions from riskier investment banking and trading arms.
Analysts have said the new measures could cost the industry 10 billion pounds. The Financial Times reported in its Monday edition that it could cost British banks 6 billion pounds.
Britain set up the ICB last year after the global credit crisis saw the government having to fully nationalise Northern Rock and part-nationalise Royal Bank of Scotland and Lloyds. The government now has stakes of 83 percent and 41 percent in RBS and Lloyds, respectively.
Finance minister George Osborne has already backed the idea of ring-fencing banks' retail operations deemed to be vital to the broader economy, and a Treasury source said Osborne was pleased with the ICB's final report.
"He thinks it is a very good report and regards it as an important step in reforming our banks so that we do not repeat the terrible mistakes of the last few years," the source said.
Yet the banks could be given years to implement the reforms after recent financial market turmoil and a deepening euro zone debt crisis raised fears over the impact of swifter change.
Britain's "Big Four" banks -- Barclays, HSBC, Lloyds and RBS -- have fought hard against excessively tough new regulation and were expected to continue lobbying after the ICB's report is out.
GOVERNMENT TENSIONS OVER BANK REFORM
Differing opinions over how to tackle the banks in the wake of the credit crisis have caused tension in the Conservative-led coalition government formed with the Liberal Democrats.
Liberal Democrat Business Secretary Vince Cable has been alone in seeking a full split-up of retail and investment banking operations into two new companies. Labour's opposition finance minister, Ed Balls, has said he would like a "tough but fair" ring-fencing mechanism.
"Banks must be left under no illusion that reform is coming. The recession is not an excuse for postponing banking reform. Indeed our economic recovery depends on it," Cable wrote in the Mail on Sunday newspaper.
The ring-fencing approach would get lenders to form separate subsidiaries for retail and investment banking operations while keeping the same parent holding company.
The reforms would likely hit banks' profit because of the implications for their funding costs, which could, in turn, make it harder for them to lend to businesses.
The ICB is still to define how the separation should occur -- how much retail capital and deposits the banks should be able to use to fund their investment banking arms.
The ICB, headed by Oxford University academic John Vickers, was also expected to confirm a request for banks to hold more capital -- targeting core Tier 1 capital of 10 percent of risk-weighted assets.
Analysts expected Barclays would face the biggest hit to its profit from the ICB's proposals.
Lloyds could be affected if the ICB reiterated a recommendation to sell more assets than it has already been told to do by regulators, although Lloyds's progress on the sale of some 630 branches could mean it might avoid this.
After the final report is issued, the government will choose what to implement into law, probably starting late this year or early in 2012.
However, banks could have years to bring in the reforms, perhaps until 2019 for full implementation, since the ongoing financial market turmoil has raised concerns over the impact of swifter change.
Banking stocks all fell sharply on Friday. Barclays fell 9.4 percent, Lloyds closed down 5.7 percent, RBS fell 5.5 percent while HSBC ended down 3.4 percent.
(Additional reporting by Tim Castle and Fiona Shaikh; Editing by Sophie Walker, Dan Lalor and Leslie Adler)