The Royal Bank of Scotland Group plc
(
RBS
) has finally conceded to paying a penalty of £390 million ($612
million) to the Financial Services Authority, Commodity Futures
Trading Commission and Department of Justice to resolve charges
against the bank for its involvement in the manipulation of the
London Interbank Offered Rate (LIBOR).
RBS - 82% owned by UK taxpayers - said that 21 employees found
guilty of the scandal have either been removed or left the
company before the settlement. However, the remaining have been
closely controlled.
Moreover, John Hourican, head of RBS' investment banking division
was compelled to resign, following the LIBOR scandal. Though
Hourican had no role to play in the wrongdoing, the scam occurred
during his tenure, thereby depriving him of the past and present
compensation worth about $14.1 million.
Further, RBS will take back past and present bonuses from the
traders associated with the rate-rigging scam as well as from the
staff involved in the bank's operations. Therefore, total
compensation is expected to amount to around £300 million ($470
million).
As part of a proposed agreement with the U.S. Department of
Justice, RBS' Japanese subsidiary, RBS Securities, entered into a
plea for issues related to the manipulation of certain benchmark
interest rates, including Yen LIBOR. Therefore, the subsidiary
will pay $50 million of the total settlement.
Moreover, RBS has to pay a $100 million penalty above the fine
forced on the subsidiary as part of the deferred prosecution
agreement (DPA). Further, out of the total penalty amount, $325
million will be paid in fines to the U.S. Commodity Futures
Trading Commission and $137 million in fines to the UK's
Financial Services Authority.
The Back Story
As a matter of fact, RBS had been subject to scrutiny over this
issue for quite some time by the U.S. Commodity Futures Trading
Commission, the Justice Department and the UK Financial Services
Authority.
In addition to RBS, several of the big banks including
Bank of America Corp.
(
BAC
) and JPMorgan Chase & Co. are under the strict vigil of
regulators around the world in connection to the LIBOR
manipulation scam.
The LIBOR is determined on the basis of estimates of rates at
which banks find it appropriate to borrow from each other. It is
alleged that banks coordinated amongst themselves and submitted
false rates. This fraudulent move was made to profit from trades
or to appear more creditworthy than they actually are.
Since LIBOR is used as a benchmark for several lending
transactions around the world, any manipulation would impact
billions of users around the globe. Hence, regulatory authorities
are investigating the matter thoroughly and plan to put forward
an exemplary judgment so as to terminate such shrewd practices in
the future, bring justice to the sufferers and punish the
wrongdoers.
Earlier in 2012,
Barclays Plc.
(
BCS
) admitted to its fraudulent practices and agreed to pay a
penalty of $450 million for rigging the LIBOR. On the other hand,
UBS AG
(
UBS
) has finally agreed to pay a penalty of CHF 1.4 billion ($1.5
billion) to the U.S., UK and Swiss authorities.
In Conclusion
While the settlement will put to rest a long-drawn investigation
and RBS can breathe relief, this will also adversely impact its
financials. Further, this settlement could be referred to as an
exemplary one and could trigger similar settlements by other
banks depending on their wrongdoings.
Notably, RBS' business has been severely impacted by the
financial crisis and the company suffered huge losses on credit
bets during that time. However, the British government came to
its aid and currently the company is subject to stringent capital
norms. Moreover, the tax probe and mounting legal claims have
added to its woes.
We believe the troubles for this stock are far from over. Hence,
RBS currently carries a Zacks Rank #3 (Hold).
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