November 3, 2014 / 1:53 PM / 3 years ago

Banks set aside up to $7 billion as UK currency settlement looms

Passersby walk inside HSBC headquarters in Hong Kong July 30, 2012.Bobby Yip

LONDON (Reuters) - Major banks have set aside almost $7 billion for potential settlements with regulators investigating allegations of collusion and manipulation in foreign exchange markets, the first of which could come in Britain later this month.

Europe's largest bank HSBC (HSBA.L) on Monday was the latest bank to make provisions in its most recent earnings report, putting aside $378 million specifically for a potential settlement with Britain's Financial Conduct Authority (FCA).

HSBC is the last of six banks in talks with the FCA over a group FX settlement to report their results. The other five also set aside substantial sums for litigation provisions.

British banks Royal Bank of Scotland (RBS.L) and Barclays last week set aside $640 million and $800 million, respectively, specifically for settlements related to the global FX probe which has been running for a year.

This means the three British banks have made almost $1.8 billion provisions in their latest earnings reports specifically for FX-related issues.

The near $7 billion from eight banks, also including Deutsche Bank (DBKGn.DE) and Credit Suisse CSGN.VX, isn't entirely for currency-related issues, although that's where the lion's share of the total is likely to be spent, analysts say.

Banks' provisions are cash earmarked to pay for costs or losses that are anticipated to occur in the future and the final amount may be more or less than the sum set aside.

However, with potential settlements still to come with the U.S. Department of Justice (DOJ) - which has shown it has the power and willingness to levy multi-billion dollar fines on banks for financial misconduct - the final bill could be much higher.

Around ten other regulators around the world are also investigating.

The FCA's talks with six banks are at an advanced stage and a settlement for between 1.5 and 2 billion pounds ($2.4-$3.2 billion) could come later this month.

The six are RBS, Barclays, HSBC, Switzerland's UBS UBSN.VX, and U.S. titans JP Morgan (JPM.N) and Citi (C.N). Despite its position as the second biggest currency market bank in the world, Deutsche isn't part of these collective talks.

This settlement is likely to be based on banks acknowledging lax internal compliance, oversight failures and market conduct breaches by individual employees, but not deliberate manipulation of the $5 trillion-a-day market.

On Monday, HSBC said its "detailed" talks with the FCA centre on systems and controls relating to one part of its spot FX trading business in London.

UBS ring-fenced the most of any single bank in the third quarter, its $1.9 billion almost double the provisions made by the next in line Deutsche Bank with $1.1 billion and JP Morgan with $1 billion.

All three declined to reveal in their recent earnings reports how much of these provisions were specifically for foreign exchange.

Citi added a further $600 million for legal costs, while Credit Suisse said $400 million would be kept back for future litigation.

No bank has been accused of wrongdoing, but several are cooperating with UK, U.S. and other authorities around the world in their investigations into the allegations of collusion and price manipulation.

Settlements with U.S. regulators are expected to be much more costly.

Earlier this year, French bank BNP Paribas (BNPP.PA) paid the DOJ a record $8.9 billion fine for violating U.S. sanctions on Sudan, Libya and Cuba between 2002 and 2012.

Estimates on how much banks will be fined in total for FX vary wildly. Earlier this year, banking research firm Autonomous put the worldwide total at around $35 billion.

This would dwarf the $6 billion paid so far by 10 financial firms to settle the international investigation into the manipulation of Libor interest rates.

(This refiled version of the story removes extraneous word from first paragraph).

Reporting by Jamie McGeever and Steve Slater; Editing by Alexander Smith and Toby Chopra

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