RBS Leads European Banks Lower After U.S. Mortgage Lawsuit
Royal Bank of Scotland Group Plc (RBS) led European banks lower, dropping the most in more than two years after 17 lenders were sued by the U.S. over the sale of mortgage-backed securities and on investor concern over interbank lending.
RBS, Britain’s biggest government-owned lender, fell 12 percent to 21.78 pence in London, the sharpest decline since May 2009. Other European lenders also fell including Barclays Plc (BARC), down 6.7 percent to 154.15 pence and Deutsche Bank AG (DBK) retreated 7.5 percent to 23.82 euros.
“Among the U.K. banks, RBS has the highest amount of securities under investigation by a considerable order of magnitude,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. RBS sold the most among the European banks, $30.4 billion, or 68 of 179 securities in that region covered in the lawsuit, according to Bloomberg Industries.
On Sept. 2, Barclays and Deutsche Bank were among European, Asian and U.S. banks sued by the U.S. Federal Housing Finance Agency to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac. The Bloomberg Europe Banks and Financial Services Index fell 5.6 percent.
“This is clearly negative news for all involved and the banks will likely have to take further provisions and will continue to suffer further reputational damage,” Mediobanca Securities said in a note to clients today.
The FHFA lawsuit filed against RBS “details significant differences between the bank’s disclosed assumptions for loan- to-value, owner occupancy and stated income,” Bloomberg Industries wrote in a note today.
For one of RBS’s mortgage-backed security deals, the product’s prospectus said no loans exceeded the value of the property on which they were secured, according the filing. The FHFA said 22 percent of loans did so. RBS on Sept. 3 said it would “vigorously” defend itself against the lawsuit.
Meanwhile, the premium European banks pay to borrow in dollars for three months through the swaps markets increased to the most since December 2008, a sign lenders may be struggling to get funding.
“This is really about fears about liquidity and solvency now,” said Andrew Lim, a banking analyst at Espirito Santo Investment Bank in London. “U.S. money markets are lending less for a second month to European banks, particularly French banks. Banks are having to come back to the market to complete their 2011 borrowing programs and if they fail in that respect that’s going to create a lot of risk.”
Balance Sheet Improvement
The cost of converting euro-based payments into dollars, as measured by the three-month cross-currency basis swap, fell 4.8 basis points to 95 basis points below the euro interbank offered rate, or Euribor, as of 9:24 a.m. in London, indicating a higher premium to buy the dollar, according to data compiled by Bloomberg.
For U.K. banks, “given balance sheet improvement and liquidity, solvency is not seen as a risk,” Bank of America Corp. analysts led by Michael Helsby in London wrote in a note to investors today. “The U.K. is well placed in an international perspective, which should provide differentiation for U.K. banks.”
On Sept. 12, when Oxford University academic and Chairman of the government-appointed Independent Commission on Banking John Vickers presents his findings on how the country’s banks should be structured to protect depositors and the government from the consequences of a bank failure.
Banks won’t be compelled to implement proposals from the ICB until 2015 at the earliest, a person with knowledge of the discussions said on Sept. 1. The date is the soonest possible for the commission’s recommendations, said the person, who declined to be identified because the talks are private. Introducing the new rules as late as 2018 has also been discussed, the person said.
To contact the reporter on this story: Howard Mustoe in London at email@example.com
To contact the editor responsible for this story: Edward Evans at firstname.lastname@example.org
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.