February 6, 2013 / 5:55 PM / in 5 years

TEXT-FITCH: RBS Libor settlement highlights high UK bank conduct risk

Feb 6 (Reuters) - The GBP390m settlement reached by RBS for misconduct relating to Libor highlights the regulatory and reputation risks facing global and trading banks, Fitch Ratings says. RBS’s strategy to significantly reduce its markets operations should reduce these risks in the future, but conduct costs are likely to remain across the group in the short term.

The potential for lasting damage to individual franchises as a result of the Libor scandal is unclear. The complexity of trading operations and products contributes to litigation risk and multiplies the “unknowns” that can emerge from ongoing regulatory changes, especially at multiple national levels. But the impact is likely to be more limited for RBS as it shrinks its markets business. The restructuring should reduce earnings volatility and improve the risk profile, and the remaining franchise should not be significantly eroded.

Furthermore, although the settlement is substantial relative to the group’s underlying operating profits, the costs are largely offset by recouping around GBP300m from the bonus pool set aside primarily from markets operations. We believe this demonstration of truly variable compensation is positive and gives management greater financial flexibility.

Costs from conduct risks are likely to remain a persistent industry feature in 2013, with a number of global banks continuing to face regulatory investigations, reviews and litigation. RBS has also taken a cumulative charge of around GBP1.7bn for payment protection insurance claims over the last two years and has stated that it will meaningfully increase its provision for mis-selling interest rate hedging products to small- and medium-sized companies above the GBP50m it made in Q212.

Increased scrutiny of banking conduct and standards by politicians and regulators means that the creation of new high-risk products ought to be substantially reduced over time.

RBS agreed today to pay penalties of GBP87.5m, USD325m and USD150m to the UK’s Financial Services Authority, the United States Commodity Futures Trading Commission and the United States Department of Justice to settle investigations into Libor.

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