Banks Face Legal Tab for Libor

RBS, Deutsche Bank likely to see the highest costs related to Libor probes, Morgan Stanley says.

Royal Bank of Scotland Group Plc and Deutsche Bank AG may face the highest litigation costs of 16 banks that face potential fines and lawsuits for rigging benchmark interest rates, Morgan Stanley analysts estimate.

Legal expenses stemming from probes into manipulation of the London interbank offer rate, or Libor, could range from $59 million for Lloyds Banking Group Plc to as much as $1.04 billion for Deutsche Bank and $1.06 billion for Edinburgh-based RBS, according to estimates published today by Morgan Stanley’s Betsy Graseck in New York and Huw van Steenis in London. The costs probably would apply in 2013 and 2014, they wrote.

Barclays Plc, the second-biggest U.K. bank, agreed last month to pay 290 million pounds ($448 million) in regulatory fines for rigging Libor, spurring resignations of the chairman, the chief executive officer and its chief operating officer. The fines raised speculation about penalties that may be imposed on other banks involved and the cost of lawsuits that follow.

Banks will “pay a premium” to the fines levied on London- based Barclays, which received a 30 percent discount from the U.K.’s Financial Services Authority because the bank “was early and cooperative with regulators,” according to the Morgan Stanley report. “We calculate an implied base penalty of $650 million” on other banks, the analysts wrote.

The analysts also assume that UBS AG, Switzerland’s largest bank, will receive reduced fines of 250 million Swiss francs ($254 million), gaining “leniency for being an early confessor in the Libor probe and cooperating with the investigations.”


Total Impact

Overall, regulatory fines probably will reduce 2012 earnings per share at implicated banks by 7 percent to 12 percent, the analysts estimate. On top of that, litigation costs could reduce earnings per share by 7 percent over 2013 and 2014, according to the report.

To estimate litigation risk at the 16 banks named in class- action lawsuits, the analysts assumed that that Libor was understated every day for four years by 0.01 percentage point, which implies a collective cost of $6 billion for all the firms.

The analysts also examined the size of the interest-rate derivatives holdings of each bank. Because RBS and Deutsche Bank, based in Frankfurt, have the largest books, the analysis estimates that those two banks would face the highest legal costs. Spokesmen for both companies declined to comment on Morgan Stanley’s projections.

The estimates “are the result of significant assumptions, but we hope to at least provide a framework for how to assess the Libor litigation risk,” the analysts wrote.

Morgan Stanley, based in New York and the sixth-biggest U.S. bank, isn’t on the panel of firms that sets Libor rates.



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