RBS fined US$5.5bn over US subprime crisis

Royal Bank of Scotland will pay US$5.5 billion (S$7.6 billion) to settle one of the two major US investigations into allegations it mis-sold mortgage-backed bonds that it needs to resolve before the British government can sell its shares.
 A worker sweeps in the foyer of a Royal Bank of Scotland office in the City of London.
A worker sweeps in the foyer of a Royal Bank of Scotland office in the City of London.PHOTO: REUTERS

LONDON (AFP) - Royal Bank of Scotland agreed Wednesday to pay a US regulator US$5.5 billion (S$7.58 billion) over its role in the subprime mortgage crisis more than a decade ago.

The lender said in a statement that the £4.2-billion penalty was a "heavy price" to settle US mis-selling claims, which occurred in the run-up to the notorious global financial crisis and subsequent worldwide recession.

"The Royal Bank of Scotland... has reached a settlement with the Federal Housing Finance Agency," the lender said in a statement on Wednesday (July 12), adding that FHFA "litigation against RBS will be withdrawn".

The settlement resolves one of two major US probes into mis-selling allegations; RBS has yet to reach a deal with the Department of Justice.

The overall level of the fine will be US$4.75 billion due to special indemnity agreements.

Edinburgh-based RBS remains 70-per cent state-owned after receiving a vast government rescue at the height of the 2008 crisis in the world's biggest banking bailout.

"This settlement is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions," RBS chief executive Ross McEwan said in the statement.

The deal was "an important step forward in resolving one of the most significant legacy matters facing RBS", he added.

The fine is largely covered by money already set aside by the bank, which has long been plagued by legacy costs arising from its past conduct.

McEwan meanwhile cautioned the bank may need to set aside more money to settle outstanding claims.

"We have always been very open about the fact there could be further provisions," he said.

RBS chief finance officer Ewen Stevenson added the FHFA settlement was "in the region of what we'd been anticipating", but analysts indicated that it was higher than forecast.

Once the US$5.5 billion is paid, RBS will be reimbursed US$754 million under contractual agreements entered into with third parties.

Equities analyst Joseph Dickerson, at US bank Jefferies, said the net US$4.75-billion figure was US$1.0 billion higher than market expectations.

"This settlement clears a major hurdle for the bank, though there remain further significant related costs, such as the DOJ," he said.

Dickerson forecast that RBS would need to set aside another US$2.5 billion to cover the DoJ deal in the fourth quarter.

The system-wide failure of complex securities derived from residential mortgages caused a cascading wave of bankruptcies and crises that sparked a global recession, leading to tens of millions of job losses around the world.