US regulators warn RBS it could pay $13 billion over lawsuit

Bank is seeking to have case over its handling of mortgage securities dismissed

US regulators have told Royal Bank of Scotland it could pay as much as $13 billion if it loses a lawsuit over its handling of mortgage securities. The US. Federal Housing Finance Agency (FHFA), suing in a Connecticut court on behalf of government-owned lenders Fannie Mae and Freddie Mac, made the estimate in a June 24th court filing in a related case in a Manhattan federal court.

RBS is seeking to have the case dismissed, arguing the suit filed in 2011 came too late. A spokesman for the bank declined to comment.

UK chancellor of the exchequer George Osborne is preparing to sell shares in RBS as early as September at a loss to the UK treasury.

A settlement is expected to be "substantial" and could come this year, RBS chief executive officer Ross McEwan has said. The impact of a settlement "of this magnitude could have on RBS's capital adequacy ratios is manageable," analysts at Fitch led by Claudia Nelson wrote in a note to clients on Friday. That's because the bank had £2.1 billion-pounds of litigation reserves at the end of March and will get a "positive boost" to capital from the sale of its Citizens Financial Group , Fitch wrote.


RBS is “likely” to report a loss for 2015 on litigation costs, Fitch added.

The bank “faces strong medium-term challenges, of which profitability is chief, due in part to uncertainty about the size and timing of further regulatory fines.”

The $13 billion sum marks the first time the FHFA has attached a potential value to its case against RBS in a US district court in New Haven, Connecticut, and outstrips previous estimates.

The London Times reported in January that RBS could pay more than £5 billion pounds over its sale of $32 billion of residential mortgage-backed securities. RBS overstated the ability of borrowers to repay the underlying mortgage loans when it sold the securities from 2005 to 2007, using false and misleading documentation, the FHFA said in the Connecticut filing.

The bank will probably reach a deal with the FHFA before the case goes to trial, and at a lower price tag, said Elliott Stein, an analyst for Bloomberg Intelligence. He kept his estimate for a settlement at $1.8 billion to $4.5 billion.

The FHFA arrived at the potential value of the Connecticut case using a previous $806 million mortgage securities judgment in May against RBS and Nomura Holdings in the US district court for the southern district of New York. The banks are appealing the verdict.

Using that case as a “rough reference point, that extrapolates to a judgment in the Connecticut action of nearly $13 billion,” the FHFA wrote in a document linked to its New York case.

- Bloomberg