(Reuters) - Lloyds Banking Group Plc (LLOY.L) is in talks with Britain's Prudential Regulation Authority over "ringfencing" rules in an attempt to save its investment banking functions, the Financial Times reported on Sunday.
The state-backed group is concerned that the cost of operations after ringfencing takes effect may outweigh the benefits, forcing the group to shut investment banking activities and operate as a retail business alone, sources familiar with Lloyds' plans told the newspaper.
Lloyds Banking Group and the Prudential Regulation Authority could not immediately be reached for comment.
Ringfencing for banking groups in the UK is scheduled to be implemented by 2019. It is expected to force big British banks to legally separate their retail banking operations from investment banking, in line with the recommendations of the Independent Commission on Banking, which was led by Sir John Vickers.
The FT quoted people familiar with the matter saying that Lloyds is in discussions with the regulator to allow it to operate a "lower" ringfence so that its retail and investment banking activities would not have to be so rigidly separated.
The report cited people close to Lloyds saying that the bank's initial discussions with the regulator were progressing well and that the regulator "understood" the group's situation. One of the sources said "we hope the regulator will be pragmatic."
"Given that we are predominantly a retail and commercial bank, we would expect to be less affected than other major UK banks by the implementation of a retail ringfence. We remain committed to providing our clients with a broad range of banking services," a Lloyds representative told the Financial Times.
The PRA is expected to consult and finalize the structure of ringfencing with banks in 2014.
(Reporting by Aashika Jain in Bangalore; editing by Matthew lewis)