* $1.5 bln second-highest fine ever levied on a bank
* Probe centres on Libor rigging at UBS in Japan -sources
* Settlement will shine spotlight on RBS, other banks
* Libor latest blow for UBS after $2.3-bln trading fraud
By Katharina Bart
ZURICH, Dec 19 (Reuters) - Switzerland's UBS is set to pay the second-largest fine ever levied on a bank on Wednesday when it admits that a group of its traders rigged Libor interest rates.
Zurich-based UBS will pay around $1.5 billion for the manipulation of yen Libor between 2005 and 2010 by 36 of its staff around the globe, a source familiar with the matter has said.
The fine against UBS, whose spokesman declined comment, would be the second-largest paid by a bank and comes just a week after Britain's HSBC agreed to pay the biggest ever penalty - $1.92 billion - to settle a probe in the United States into laundering money for drug cartels. [ID: nL4N09L1YE]
The UBS settlement will be with U.S., British and Swiss regulators, although the last has no power to fine the bank. Japanese regulators are also involved, some sources have said, although it is not clear if they will be formally involved in the penalties.
UBS will admit to criminal wrongdoing by its Japanese arm, where one of its traders manipulated yen Libor and euro yen contracts, sources familiar with the matter have told Reuters.
IMPACT ON UBS
UBS's settlement would be more than three times the $450 million levied on British bank Barclays in June for similar misdeeds in the setting of benchmark interest rates, indicating the scope of wrongdoing at the Swiss bank was more extensive.
The fine would widen an expected fourth-quarter and full-year net loss, which UBS already flagged in October when it announced 10,000 job cuts and its withdrawal from many fixed income and trading activities.
However, the financial penalty is not expected to undermine UBS's capital ratios, a key goal for the bank following its investment banking overhaul and return to private banking roots.
Even after digesting a $1.5 billion payment, UBS would still be among the most strongly capitalised banks when factoring in much tougher capital rules that take full effect in 2019.
Since news broke last week that UBS's settlement could be more than $1 billion, the bank's shares have barely reacted, trading just shy of their highest level in 18 months.
The potential for political fallout in Switzerland against UBS is harder to judge, however.
While Barclays' settlement touched off a firestorm in Britain that forced its chairman and chief executive to quit, previous scandals at UBS have already culled the ranks of top bosses, as has the decision to wind down parts of the investment bank that had tarnished the bank's name.
However, the settlement could add to global public and political anger about standards and culture across the industry.
Admitting to criminal wrongdoing can be fatal for a bank, as it can lose its licence, and authorities are wary of pushing big banks to the brink. By admitting to the charge against its Japanese subsidiary, UBS is stopping short of admitting to wrongdoing at a group level.
Between 25 and 30 people have left UBS as a result of the Libor rigging investigation, according to sources. The bank had hoped for a softer touch from regulators by cooperating in industry-wide probes and was surprised by the size of the expected settlement, they added.
The criminal probe is just the latest in a series of scandals at UBS. In 2009 it settled a messy U.S. investigation into tax evasion by admitting it had helped wealthy Americans evade and cheat on their taxes, in part by paying the third-largest fine in financial history.
And the bank is still recovering from revelations about lax internal controls when London-based trader Kweku Adoboli was convicted last month over a $2.3-billion fraud.
UBS's settlement will also shine a spotlight on more than a dozen other banks that have been caught in the international inquiry into Libor rates, with most of the focus on how rates were set between 2005 and 2008.
Royal Bank of Scotland is expected to settle with regulators in January or February and is braced for fines similar to or higher than those paid by Barclays, sources have said. RBS declined to comment.
Reuters' parent company Thomson Reuters Corp collects information from banks and uses it to calculate Libor rates in various currencies according to specifications drawn up by the British Bankers' Association (BBA). ($1 = 0.6173 British pounds) (Additional reporting by Steve Slater, Huw Jones and Matt Scuffham in London; Graphics by Vincent Flasseur; Editing by Alastair Macdonald)