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(Repeats story published late on Monday)
* Banks first want to see if UK retains single market access
* Executives uncertain on how to treat continentalbusinesses
* Non-UK customers could lose protection of the ring-fence
* British banks preparing for Easter 2018 roll-out of scheme
By Lawrence White and Sinead Cruise
LONDON, Aug 1 (Reuters) - Big British banks are lobbyingregulators for more time to carve out their retail lending fromriskier parts of their business, saying Britain's decision toleave the European Union has made the separation more complexand costly.
Lenders are required to complete the so-called ring-fencingof retail operations by the start of 2019. The initiative aimsto avoid a repeat of the 2008 financial crisis, when banks' badtrading bets threatened to sink ordinary depositors and mortgageborrowers, leading to massive taxpayer-funded bailouts.
But the UK regulation - which also covers the Europeanoperations directly owned by British banks - was proposed in2011, when there was no prospect of Britain quitting the bloc.
Since the Brexit result on June 24, several leading bankshave told regulators that they first need to find out whetherBritain will retain access to the EU single market, and how muchaccess, before reorganising their businesses in such asignificant way, according to senior sources at the lenders.
The point of concern, they told the Bank of England'sPrudential Regulation Authority (PRA), is how to treat retailoperations in the Republic of Ireland and other EU countries.
Some banks do not know if they will be able to retain thesebusinesses at all post-Brexit, or what level of service theywill be able to offer customers, said the sources who declinedto be named as the discussions with the regulator were private.
This hugely complicates the process of separating theirbusinesses into two banks with individual risk appetites,customer bases and funding costs, according to the sources.
"A delay would be common sense ... we are all building (thering-fence) but we don't know what environment we're building itfor," said a senior source at one of Britain's top five banks.
The PRA declined to comment
If the uncertainties meant continental businesses would haveto remain outside the ring-fence, this would expose Europeansavers and home loan borrowers to the risks the plan wasdesigned to shield British customers from, the sources said.
BILLIONS
Much of the Brexit talks, when they come, are likely to boildown to a trade-off between Britain's controls on immigrationand its access to the EU single market.
The uncertainty will affect the biggest banks - HSBC, Barclays, Lloyds Banking Group andRBS - to varying degrees, with those with the mostexposure to continental Europe likely to be most burdened.
Banks with bigger cross-border lending activities now haveto worry about which side of the ring-fence their non-UK retailbanking businesses sit, but also whether they can maintain theirnon-UK businesses, sources said.
About 97 percent of operations at Lloyds, Britain's biggestretail bank, are supposed to sit within the ring-fence, whileHSBC, which has much larger international and investment bankingoperations, will only have 30 to 40 percent.
Lloyds has a 5.9 billion pounds ($7.8 billion) retaillending business in Germany and the Netherlands, some 9.1billion pounds of German retail deposits and a 4.5 billion poundIrish retail, corporate and commercial real estate lendingbusiness.
A source close to HSBC said its ring-fencing preparationswere unaffected by Brexit. It intends to keep its main consumerbusinesses in Europe outside the ring-fence, as they are ownedby separate subsidiaries. The bank has 380 branches and maderetail banking profits of $388 million in France in 2015. Italso offers retail banking through its 12 branches in Germany.
RBS's remaining retail business in Europe is mainly via the146 Republic of Ireland branches of its Ulster Bank branch,whose retail banking business made a profit of 330 millionpounds in 2015. The bank has also has interests in theNetherlands and Germany.
Barclays is in the advanced stages of exiting its Europeanretail businesses altogether.
EASTER START
Ring-fencing is a British, rather than EU-driven,requirement and the start date is embedded in law, meaning itcannot be changed without parliamentary approval.
Barclays finance director Tushar Morzaria said on Friday that his bank would flip the switch over the long Easter weekendin 2018 - March 30-Apr. 2 - giving it four days to create thenew ring-fenced retail entity and transfer customers across.
"Other banks will be doing something similar as it's theonly four-day weekend in the year," he said.
Morzaria said Barclays' ring-fencing plans would beminimally affected by Brexit, but that other lenders with retailoperations in Europe could see their plans complicated.
The banking sources said they hoped the PRA would providegreater clarity on how to treat these businesses and apply apragmatic approach to enforcement after the official Jan 1 2019start date, particularly if Britain's future relationship withthe EU remains undecided.
Banks are close to having to seek credit ratings for theseparate entities, one of the sources said, but without formalclarity on how to treat European businesses, the ratings whichinfluence how much banks will pay for funding may be tough toassign.
"The UK referendum result could complicate some banks' plansbecause the extent to which they will be able to service EUcustomers from UK entities going forward is now less clear,"said Alan Adkins, group credit officer at Fitch Ratings.
The ring-fenced banks require new boards of directors, newstaff contracts, and separated risk management and IT operationsas well as individual balance sheets.
The task of recruiting appropriate board members and themake-up of the board for both the ring-fenced and non-ringfenced entities will be very different, depending on where thenon-UK businesses end up, the sources said.
Some senior bank executives said they didn't expect the PRAto offer any kind of moratorium on the plan, and are proceedingwith their separation plans without delay.
"I can't afford to sit back for three months and think'well, I wonder'," a second senior bank executive said.
"The principles of separating your markets business fromyour commercial and retail banking are there ... we haven't seenany flinching from the PRA on that whatsoever," he added.
($1 = 0.7577 pounds)
(Additional reporting by Huw Jones and Andrew MacAskill;Editing by Pravin Char)
