BREAKINGVIEWS-RBS shares bake in Libor’s known unknowns

Tue Jan 29, 2013 9:47pm IST

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(Adds details on share move in paragraphs 1, 4)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay

LONDON, Jan 29 (Reuters Breakingviews) - Royal Bank of Scotland (RBS.L) shares look to be baking in Libor’s known unknowns. The UK bank fell 6 percent on Jan. 29 amid fears it may be found criminally liable for fixing the London interbank offered rate. The movement - 2.5 billion pounds off RBS’s market value - strikes a reasonable balance between the likely and relatively manageable outcome, and the small risk of a really painful one.

The probable scenario is that the authorities investigating Libor inflict similar treatment on RBS as on domestic rival Barclays and Swiss peer UBS. Barclays received a $450 million fine from the UK’s Financial Services Authority, the Commodity Futures Trading Commission and Department of Justice, as part of a deal that effectively meant no criminal liability. UBS (UBSN.VX) swallowed a $1.5 billion fine and admitted criminal liability in Japan.

If RBS gets UBS’s medicine, things won’t be too bad. True, the currently mooted $800 million fine might eat into the bank’s capital. But criminal liability in a non-U.S. jurisdiction isn’t a big deal if the domestic regulator publicly pledges not to remove the lender’s banking licence, as happened with UBS and Japan. UBS shares rose 2.9 percent when its settlement came out on Dec. 19.

The real pain would come if RBS admitted criminal liability to the DoJ. If the U.S. regulator also withdrew RBS’s banking licence, the bank would have to consider a fire-sale of its broker dealer unit and its Citizens retail network. Dumping Citizens today would mean getting rid of one-third of RBS’s earnings for a gain of only 60 basis points on the core Tier 1 ratio, assuming a sale at 70 percent of its 7.5 billion pounds book value, Credit Suisse says. Today’s market move could represent investors pricing in the difference between a Citizens sale at these levels, rather than book value.

If RBS is guilty of misdemeanours worse than those of UBS, such a scary scenario isn’t impossible. The recent HSBC (HSBA.L) money-laundering ruling has led to fears that the U.S. regulator is too soft, and that banks’ vulnerabilities make them “too big to jail”. And the sanguine reaction to UBS’s criminal liability might reassure supervisors that harsh treatment will not endanger financial stability.

But if the United States wants to punish RBS, it remains more likely that it will do so by proxy: it confers extensively with other national regulators, and may be satisfied by the bank admitting liability in an Asian jurisdiction, as happened with UBS. That’s better than risking a diplomatic spat by damaging a huge asset majority-owned by the UK. Until investors know exactly what RBS did, they are right to apply an uncertainty discount.

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CONTEXT NEWS

- Royal Bank of Scotland could plead guilty to criminal charges as well as paying a 500 million pound fine to settle Libor-fixing charges, the Wall Street Journal reported on Jan. 29.

- RBS executives are resisting any guilty plea, the Journal said.

- RBS shares were trading at 345 pence as of 1345 GMT on Jan. 29, down 6 percent

- Reuters: Downgrades and Libor woes hit RBS [ID:nL5N0AY7BI] - For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Chris Hughes and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS RBS/

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