Royal Bank of Scotland Group (RBS.L) saw 1.3 billion pounds ($2.1 billion) wiped off its value on Tuesday following a report that it could face criminal charges as part of an impending settlement over its role in a global interest rate rigging scandal.
The Wall Street Journal reported that U.S. authorities were pushing RBS to accept criminal charges as part of a settlement which will see it fined up to 500 million pounds for the attempted manipulation of the London interbank lending rate (Libor) and other benchmark interest rates.
"It's put the word 'Libor' back in front of the banks and people are using it as an excuse to take profits," says Central Markets chief strategist Richard Perry.
RBS shares closed the day down 6 percent, the leading faller in a 0.28 percent-weaker European bank sector .SX7P, with volume in the bank's shares at 257 percent of the 90-day daily average.
The bank declined comment on the WSJ report.
One RBS shareholder told Reuters that criminal charges would make the bank more vulnerable to future litigation and said Chief Executive Stephen Hester would be reluctant for the bank to accept criminal responsibility.
"Stephen Hester is not the kind of man to play a dangerous game but the stakes here could be rather high," one of the bank's biggest institutional shareholders said.
The bank is braced for fines of up to 500 million pounds ($785 million) for its role in the scandal and expects the punishment to be meted out as early as next week, sources have said.
RBS, which is 81 percent owned by the British taxpayer, would be the third bank after Barclays (BARC.L) and UBS UBSN.VX to settle allegations over the attempted manipulation of the London interbank offered rate (Libor) and other benchmark interest rates.
Barclays was fined $453 million in June while UBS paid about $1.5 billion in December. However, some analysts believe those fines could be dwarfed by the costs to banks from civil litigation linked to attempted interest rate rigging.
British trade union Unite attacked RBS over a report in the Financial Times saying it planned to pay its investment bankers bonuses of as much as 250 million pounds at a time when branch staff are being laid off. Unite called on Britain's finance minister to intervene.
"Once again it looks like ordinary bank workers and taxpayers will pay the price for the greed at the top of RBS. It is time George Osborne put his foot down. This is no way to repay the country's patience," the union said.
RBS paid out 390 million pounds in bonuses at its investment bank a year ago. Sources have told Reuters it plans to reduce payments by over 100 million pounds this year to help pay Libor fines.
RBS is facing intense scrutiny on its pay and bonuses due to the state's majority ownership, although Barclays has also come under stiff pressure to cut pay for its executives and investment bank staff for several years.
Barclays is under particular pressure to show restraint this year following its Libor punishment and criticism that its culture and standards were too lax.
New CEO Antony Jenkins, who took over in August after his predecessor Bob Diamond was felled by the Libor scandal, has pledged to improve standards and restrain pay for staff and the bank has sounded out some leading investors for their views.
Barclays could award bonuses of 1.5 billion to 2 billion pounds for last year, Sky News reported on Tuesday, citing people close to the bank. That would be down from 2.2 billion a year ago.
Jenkins, who gets a base salary of 1.1 million pounds and could get 2.75 million in annual bonus, is being lined up to get a bonus of more than 1 million pounds, payable in deferred shares, Sky said.
Barclays declined to comment.
(Reporting by Matt Scuffham, Sinead Cruise and Steve Slater; Editing by Hans-Juergen Peters)