RBS settles with US regulator over mortgage-backed securities

Royal Bank of Scotland has agreed a settlement with US regulators of $5.5bn (£4.2bn) to resolve claims over its issue of residential mortgage-backed securities in the run-up to the financial crisis, though

Of the $5.5bn that RBS will pay to FHFA, $754m will be reimbursed to RBS under indemnification agreements with third parties.

RBS will need to make an extra $196m (£151m) charge in its second-quarter results for 2017 in order to cover its total cost $4.75bn cost, having as of 31 March held provisions of $8.3bn against RMBS, of which $4.55bn related to FHFA.

The Federal Housing Finance Agency, which as a result of the settlement has dropped its litigation against RBS, made claims against the UK bank relating to its issue and underwriting of approximately $32bn (£25bn) of RMBS in the US between 2005 and 2007, where RBS and 16 other banks were accused of making false statements while selling the securities.

Chief executive Ross McEwan said: “Today’s announcement is an important step forward in resolving one of the most significant legacy matters facing RBS and is further evidence of the determination of the bank’s leadership to put our remaining issues behind us.

“This settlement is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions.”

Following the FHFA settlement, RBS’s unresolved RMBS litigation matters involve the issuance of less than $1bn, assuming court approval of an agreed and provided for settlement.

The unresolved amounts does not include the FHFA case involving RMBS issued by Nomura, which RBS estimates its net exposure as approximately $383m, for which it intends to pursue indemnification and which has also been included within existing provisions.

But RBS stressed that other US investigations, particularly the DOJ’s civil and criminal investigations, and other outstanding litigation matters "remain uncertain, including in respect of whether settlements for all or any of such matters may be reached", which explains the near-£3bn of other provisions it has set aside.

Laith Khalaf, a senior analyst at broker Hargreaves Lansdown, said RBS and the UK taxpayer are still counting the cost of the bank’s former misdemeanours ten years on from the financial crisis, with a looming DoJ fine an elephant in the room.

"The coming year isn’t going to be pretty for the bank, as it works through the costs of outstanding US litigation for mortgage-backed securities sold in the run up to the credit crunch. The bank also has to resolve European competition issues, which required it to spin out a challenger bank as part of the terms of its state bailout," he said.

"However RBS has to swallow this medicine in order to return to good health, and this latest settlement represents a major milestone in what has turned out to be a very long journey."

He said until the precise DoJ fine, which is likely to be sizeable, is known, shareholders are exposed to a potentially nasty surprise.