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Wednesday, 30 July 2014

Mid-table mendacity

RBS moves away from Libor danger zone

Royal Bank of Scotland is inching away from the Libor danger zone. The UK bank has been fined 390 million pounds for its role in fixing the interbank rate, higher than Barclays’ 290 million pounds but much less than UBS’s 1 billion pounds. It’s a big deal, but less serious than it could have been.

The settlement, announced on Feb. 6, contained one significant piece of good news for RBS. It has avoided admitting criminal liability in the United States. Instead, the bank has followed UBS in doing so in Japan.

Via a “deferred prosecution agreement”, RBS will agree to do things it should be doing anyway. As long as it does them, the bank’s U.S licence remains safe. With a criminal conviction, it would have been forced to sell its U.S operations, including the Citizens retail bank, quite possibly at a fire-sale price. RBS shareholders will be relieved that the worst has been avoided.

RBS’s Libor misdeeds were at a relatively low level - traders attempting to manipulate the rate for personal gain. That’s different from Barclays, where senior management also tried to make the bank look healthier during the 2008 crisis. John Hourican, the RBS investment bank head, was not directly involved in any of the misdeeds, but is still leaving the bank.

While weak controls may look less systemically nefarious than manipulative bosses, the accounts of trader misdeeds still awaken memories of RBS’s gung-ho pre-crunch days. On the whole, though, the Libor resolution should help RBS, especially if it can pay its fine with cancelled bonuses, not shareholders’ equity.

The UK government, which owns 81 percent of that equity, wants to start the process of selling down its stake in April 2014. The removal of the Libor overhang removes one item on the to-do-first list. But the list remains long: pay fines for mis-selling of mortgage and interest rate swaps, increase provisions, bump up capital and start paying dividends. Even after this settlement, the deadline still looks ambitious.

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Royal Bank of Scotland is to pay a 390 million pound fine for its role in the Libor scandal, the UK bank announced on Feb. 6.

Under the terms of the settlement, RBS will pay 87.5 million pounds to the UK’s Financial Services Authority, $325 million to the U.S. Commodity Futures Trading Commission and $150 million to the U.S. Department of Justice.

As part of the agreement with the DoJ, RBS has entered into a “deferred prosecution agreement” in relation to one count of wire fraud relating to Swiss franc Libor and one count for an antitrust violation relating to Yen Libor. RBS Securities Japan will also plead guilty to one count of wire fraud relating to Yen Libor.

RBS conceded that its Yen and Swiss franc derivatives traders sought to influence the setters of Yen and Swiss franc Libor between October 2006 and November 2010. The bank said its Libor wrongdoing concerned traders manipulating the rate for financial advantage, rather than senior management condoning the setting of artificially low rates to avoid the bank looking weak during the 2008 financial crisis.

John Hourican, the head of RBS’s investment bank, will leave the group. RBS said that while Hourican had no involvement in or knowledge of the misconduct, he and the Board felt he should leave in recognition of the management issues identified and the impact on the group’s reputation.

At 1500 GMT, RBS shares were trading at 339 pence, up 0.4 percent.

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