Britain to accept ICB bank reforms in full

* Govt to issue formal response to ICB, to "accept in full"

* ICB legislation to be done within current parliament - Cable

* Proposal on "bail-in" debt could be watered down after lobbying

* Banks warn of cost burden, set to continue lobbying

* Bank shares fall in early trade (Adds comment from BBA, analyst, updates share price)

By Sudip Kar-Gupta

LONDON, Dec 19 (Reuters) - Britain will accept proposals to shake up the country's banks on Monday, forcing lenders to form barriers between their retail operations and riskier investment arms to protect ordinary customers better in any future crisis.

Business secretary Vince Cable told the BBC legislation introducing reforms proposed by the government-sponsored Independent Commission on Banking would be completed within the current parliament, namely by mid-2015.

Finance minister George Osborne will issue his formal response on Monday to proposals laid out in September by the ICB, headed by John Vickers.

He may not go as far as Vickers wanted on forcing banks to hold debt that could absorb losses if they hit trouble, however.

The proposal on "bail-in" debt has been attacked by HSBC and Standard Chartered , who have threatened to quit their London headquarters for Asia.

While Vickers wanted the "bail-in" debt to apply to each bank's global assets, HSBC estimated that would cost it more than $2.1 billion a year, while Standard Chartered said Britain should wait for international rules to come in.

The government was set to apply the rule to banks' British balance sheet rather than their global assets, substantially reducing the cost, the BBC reported on Sunday.

The government set up the ICB after the 2007-08 credit crisis saw Britain nationalise Northern Rock and pump 66 billion pounds ($102 billion) into Lloyds and Royal Bank of Scotland.

While the government says taxpayers should not have to bail out lenders in the future, Prime Minister David Cameron also wants to ensure the regulations do not harm London's standing as a leading financial centre. He vetoed changes to the European Union treaty this month to protect the City.

Shares in Barclays and RBS were down 1.5 percent by 0910 GMT, while Lloyds was down 2.2 percent. HSBC fell 0.1 percent.

In September, the ICB said British banks should "ring-fence" their retail units from investment banking operations.

It said banks should hold core capital of 10 percent, plus a further 7-10 percent capital in the form of "bail-in" bonds.

There would also be limits to the extent to which a bank could use money in its retail arm for its investment bank -- a move that will increase funding costs for British lenders.

The ICB has said banks should have until 2019 to implement the proposals -- in line with plans by the Basel committee of global banking regulators to impose tougher capital requirements on banks also by 2019.

"The capital requirements are quite strict but the timetable for implementation is quite generous. Analysts had always expected that the government would tick through the reforms," Shore Capital analyst Gary Greenwood said.

LEGISLATIVE TIMETABLE TO BEGIN

The head of the British Bankers Association said an initial 'white paper' on the ICB reforms was expected in 2012, adding Monday's statement would start a formal process rather than conclude one.

BBA chief executive Angela Knight said while banks were "committed to working with the government" over the reforms, the top banks were set to continue lobbying as reforms draw nearer.

Banks have said they could be at a competitive disadvantage to rivals in Europe, Asia and the United States, which do not face the same shake-up.

They estimate the costs of the reforms would be more than the top end of the 4-7 billion pounds estimated by the ICB, making it harder for them to lend to businesses and customers, which could hurt the overall economy.

The proposals would see Britain follow Sweden and Switzerland in setting a benchmark in capital rules on banks, since the size of each of those countries' bank sectors is greater than their national GDP, creating a greater risk for taxpayers.

The issue of banking reform has caused tension between the Conservatives, who lead the coalition, and Liberal Democrats, with Cable and LibDem Deputy Prime Minister Nick Clegg fiercer critics of the banks than Cameron or Osborne. ($1 = 0.6440 pound)