Shares of the Royal Bank of Scotland stumbled on Tuesday after it emerged that federal authorities are pursuing a guilty plea against an Asian subsidiary at the center of an interest rate manipulation scandal.
Following a template developed in last year’s rare-rigging case against UBS, the Justice Department is pushing for the criminal action against the Royal Bank of Scotland, along with fines and penalties, according to two people with knowledge of the matter. The case could come as soon as next week.
The R.B.S. settlement is likely to include more than $650 million in fines levied by the American and British authorities, according to two other people with direct knowledge of the matter. At that level, the penalties would be the second largest settlement in the rate manipulation case after a $1.5 billion agreement with the Swiss bank UBS last month. Barclays paid $450 million last summer.
The Justice Department’s criminal division, which is pushing for a guilty plea with the Asian ubsidiary of the Royal Bank of Scotland, could also strike a nonprosecution agreement with the parent company.
The threat of charges against the subsidiary weighed on the stock. After the Wall Street Journal published a story about the potential guilty plea, the bank’s stock dropped 6 percent by the close of trading in London on Tuesday.
The settlement terms are not yet final. In particular, the Royal Bank of Scotland â€" which is 82 percent owned by British taxpayers after receiving a multibillion-dollar government bailout during the financial crisis â€" is resisting the guilty plea for the Asian subsidiary, fearful of the potential fallout. The bank, however, lacks leverage with the Justice Department, which can indict the subsidiary if it resists the guilty plea. An indictment would deliver a harsher blow to the bank and potentially set up a protracted legal battle.
“Discussions with various authorities†in the case “are ongoing,†said an RBS spokesman, adding that “w! e continue to cooperate fully with their investigations.â€
The bank, which is based in Edinburgh, is also expected to cut its bonus pool by up to one third, or around $240 million, as it claws back funds to pay for the pending Libor settlement, according to a person with direct knowledge of the matter. A decision on bonuses has not been made, and the final figure will be released on Feb. 28 when the bank reports its next earnings.
“There is a legitimate concern that British taxpayers, who already have bailed out the bank, will be asked to pay for past mistakes at R.B.S.,†said Pat McFadden, a British politician who is a member of the British parliament’s treasury select committee that oversees the country’s finance industry. “Steps should be taken to minimize the exposure for taxpayers.â€
Several senior RBS executives, including John Hourican, who runs the firm’s investment banking unit where the alleged illegal activity took place, are expected to step down amid the Libor scndal, though they have not been directly implicated in the matter, according to another person with direct knowledge of the matter.
The negotiations between R.B.S. and the regulators reflect the Justice Department’s aggressive new posture, as they look to hold banks responsible for wrongdoing in the rate rigging case. The wave of action has centered on the London interbank offered rate, or Libor, and other key international benchmark rates, which are central to determining the borrowing costs for trillions of dollars of financial products like corporate loans and credit cards. Banks are suspected of reporting false rates to squeeze out an extra profit and, in some cases, to deflect concerns about their financial health during the financial crisis.
Last month, the Justice Department secured a guilty plea against the Japanese subsidiary of UBS in a rate manipulation case. UBS also paid $1.5 billion in fines to the Justice Department, the Commodity Futures Trading Commission, the Financia! l Service! s Authority, the British regulator and Swiss authorities.
The deal with UBS sent a strong signal that authorities wanted to hold banks responsible for their wrongdoing. But it also limited the potential damage to the Swiss bank. By securing a guilty plea against a subsidiary, it sheltered the parent company from losing its charter to operate or other major repercussions.
“We are holding those who did wrong accountable,†Lanny A. Breuer, the head of the Justice Department’s criminal division, said at a news conference in December on the UBS case. “We cannot, and we will not, tolerate misconduct on Wall Street.â€
