RBC may reach ARS deal with regulators: report

TORONTO (Reuters) - Royal Bank of Canada (RY.TO) is in settlement talks with U.S. regulators over its role in the troubled U.S. auction-rate securities market, the Globe and Mail newspaper said on Friday.

The move may result in the bank buying back some of the investments from retail clients, the paper said.

Canada's largest bank had little to say about the news report.

"We are committed to addressing the problem of retail clients who hold auction-rate securities," RBC spokeswoman Jackie Braden said.

She declined to specify how many clients held the debt securities, or the collective face value.

The Globe report said an internal memo to brokers confirmed that RBC has been in talks with New York Attorney-General Andrew Cuomo, who along with other securities regulators has prodded investment dealers into buying back the securities from clients. The auction-rate market seized up earlier this year.

A bank analyst said this month that RBC's retail clients hold about C$1 billion ($955 million) in auction-rate securities, while the bank itself has exposure to C$4.9 billion worth of ARS.

RBC Capital Markets analyst Andre-Philippe Hardy also said he expected the bank to take a charge of about C$100 million for ARS when it announces quarterly results next week.

CIBC World Markets analyst Darko Mihelic estimates that Royal Bank will take a C$175 million writedown for ARS, plus charges for other items. But these hits are not a concern, as RBC should maintain a strong capital position, Mihelic said in a research note this week.

RBC has not yet repurchased the securities because the structure of any buyback depends on regulatory approval, the Globe report said.

"We have expressed our willingness to work with regulators to develop and implement a program to provide liquidity to certain individual clients, and small businesses and charities," it quoted the bank memo as saying.

This week, Merrill Lynch & Co Inc MER.N, Deutsche Bank (DBKGn.DE) and Goldman Sachs (GS.N) were the latest to settle with U.S. securities regulators, agreeing to buy back billions of dollars of auction-rate securities.

The securities offered interest rates that reset periodically in auctions, but when those auctions failed this year, investors were stuck holding longer-term debt of uncertain value.

The dealers have been accused of understating the debt's risk to investors.

In the second quarter, Royal Bank wrote down the value of its student loan auction-rate securities by C$184 million, putting the fair value of this portfolio at C$3.5 billion on April 30. The bank also held a small amount of closed-end funds and municipal ARS.

Shares of RBC closed up 72 Canadian cents, or 1.6 percent, at C$46.00 on the Toronto Stock Exchange on Friday.