Fitch: European Bank RMBS Fines Likely Far Lower than USD14bn
Deutsche Bank announced that it expects its final settlement to be far lower, confirming that the USD14bn is the opening position with the DoJ and pointing out that US peer banks settled for much less. Deutsche Bank is the first of the European banks for which any number has been made public. Barclays, Credit Suisse, HSBC, Royal Bank of Scotland Group and UBS, are also among the banks waiting to reach settlements with the DoJ. They have set aside reserves to cover the cost to the extent that they can reasonably estimate it, in line with accounting requirements.
We believe that the USD14bn figure for Deutsche Bank is only a starting point in the negotiations. Therefore, we expect the final outcome to be a substantially lower number, much more in line with provisions the bank has already set aside. There are no rating implications at this stage, but if the size of the final settlement turns out to be materially more than the provisions made, this could result in negative rating action. For most of the affected European banks, provisions for these RMBS settlements form a large portion of the total litigation and regulatory investigation reserves they report, shown in the chart below.
The settlements relate to a US legal process involving civil claims dealt with under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). It is impossible to calculate the basis on which settlements have been reached to date from any public disclosure, which makes it hard to estimate the likely size of the settlements European banks will face. Unlike other European banks, Royal Bank of Scotland also still has lawsuits pending relating to the US Federal Housing Finance Agency, which could result in a large final settlement.
All US banks have already settled with the DoJ, and fines have been hefty, ranging from USD16.6bn imposed on Bank of America Corporation to USD5bn for Morgan Stanley. But in some cases, final settlements bore little resemblance to the initial amounts reported by media.
Final settlements with the US banks usually comprised a combination of cash fines and a variety of "customer relief" payments. Fines were paid to various government entities, such as the DoJ, the Federal Deposit Insurance Corporation and directly to state governments. The relief payments included a range of initiatives such as loan modifications for mortgages with negative equity (underwater mortgages), refinancing packages for distressed borrowers, assistance with down payment costs and loan closing fees and donations to organisations redeveloping affordable housing.
Fines were due immediately but the relief payments may have been staggered, allowing banks to set aside additional reserves more gradually, and tax recognition may be different. It will be interesting to see the extent of relief payments for the settlements with the European banks.