Banks told to reform at cost of 7 billion pounds a year

A combination of four photographs shows (top L-R) a worker silhouetted against an illuminated sign in a branch of HSBC; Two people walking out of the headquarters of the Royal Bank of Scotland; (bottom L-R) a Lloyds bank branch near St Paul's Cathedral and a customer using a Barclays ATM, in central London July 23, 2010.

LONDON (Reuters) - The government told banks to separate their domestic retail operations and gave savers a higher priority in the event lenders hit trouble under reforms aimed at safeguarding taxpayers, at a potential cost of 7 billion pounds each year.

In a 'white paper' published on Thursday, the government also confirmed that banks will need to hold a capital buffer, or primary loss-absorbing capital, equivalent to at least 17 percent of their risk-weighted assets.

That places a tougher funding requirement upon them than in any country except Switzerland. But banks' international operations will be exempt from the rule, which would have hurt HSBC (HSBA.L) and Standard Chartered (STAN.L) particularly hard.

The government warned that the value of the state's 82 percent stake in RBS (RBS.L) and 40 percent shareholding in Lloyds (LLOY.L) would be reduced by between 6 billion and 9 billion pounds.

The purpose of the reform is to avoid a repeat of the 2008 financial crisis, when the country had to spend more than 60 billion pounds of taxpayer cash to bail out RBS and Lloyds, two of its biggest lenders.

The government estimated the cost of the reforms to be between 4 billion and 7 billion pounds each year for the banks. It had previously put the impact at between 3.5 billion and 8 billion pounds.

The 'white paper' will be followed by draft legislation in the autumn. The government wants to pass formal legislation by the end of this Parliament in May 2015 and banks would need to comply with the measures by 2019.

(Reporting by Matt Scuffham and Fiona Shaikh)