UK banks told to boost capital, shield taxpayers*****

LONDON, Apr 11 (Reuters): Britain's top banks should shield their retail operations from riskier investment banking activities and hold more capital to protect taxpayers from any future financial crisis, a government-commissioned report said. Proposals outlined on Monday appear harshest for Lloyds Banking Group, which may be forced to sell hundreds more branches in addition to the 600 already on the block in order to improve competition on the high street. For the others, ring-fencing their retail arms could force HSBC, Barclays and peers to hold billions of pounds more capital and increase funding costs, potentially squeezing their profits. Overall, however, the recommendations in the commission's 208-page interim report were not as severe as many had feared, as banks already hold close to the recommended core Tier 1 capital level of 10 per cent in anticipation of new global rules. The panel's decision to steer clear of recommending a full break-up will also give the banks more flexibility to manage their cash and means the changes will be cheaper to implement. "They've got away with it, apart from Lloyds which might have to sell off more assets, but it could have been harsher and it wasn't," said John Smith, senior fund manager at Brown Shipley. "There's relief that it's been in line with expectations." British finance minister George Osborne said he welcomed the "excellent analysis" and findings of the commission led by former Bank of England interest rate setter John Vickers. Speaking at a news conference in London Vickers said he "absolutely rejects" criticism that his report had been soft on the banks, adding the proposals could be transformative. The aim had been to make banks less risky and better able to absorb losses, thus ensuring that vital operations like payments systems and cash for ATMs are kept running if a lender nears collapse as RBS did three years ago. But by 0948 GMT its shares were up 3.3 per cent, while Royal Bank of Scotland rose 2.5 per cent and the other UK banks were broadly flat.