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RBS has reached a settlement with the US Federal Housing Finance Agency (FHFA) to pay $5.5bn (£4.2bn) in exchange for the FHFA dropping its outstanding litigation against the bank.
A total of $754m of this sum (£581m) is due to be reimbursed to RBS under indemnification agreements with third parties.
The net cost to RBS will therefore be $4.75bn (£3.65bn). RBS has already made provisions for most of this sum, but will recognise a further £151 million in its forthcoming results.
The settlement relates to approximately $32 billion of mortgage-backed securities issued by RBS in the run up to the financial crisis, to the US housing agencies Fannie Mae and Freddie Mac.
This is not the only piece of litigation facing RBS in relation to the sale of these securities, and RBS has built up a war chest of a further £3bn in order to cover forthcoming costs.
This is expected to include a sizeable fine from the US Department of Justice, which is subject to a high degree of uncertainty, and consequently acts as a millstone around RBS’ neck when it comes to passing the Bank of England stress test.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “Ten years on from the financial crisis, RBS and the UK taxpayer are still counting the cost of the bank’s former misdemeanours.
“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.
“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.
“The elephant in the room is the US Department of Justice fine, which is likely to be sizeable, and is subject to a high degree of uncertainty. RBS has already braced itself for this and other costs by setting aside £3bn, but until the precise figure is known, shareholders are exposed to a potentially nasty surprise.
“The bank is still of course largely owned by the UK government. RBS shares are currently trading at around half the price the taxpayer needs to break even on the bailout, which means a return to private hands is still a long way off.”