RBS Drops as U.S. Authorities Said to Ask for Libor Plea

Royal Bank of Scotland Group Plc fell the most in four months as U.S. authorities push for criminal charges in the probe into allegations that Britain’s biggest publicly owned lender tried to rig interest rates.

The U.S. Justice Department has extended talks to press the Edinburgh-based bank for a guilty plea in any settlement, said two people familiar with the negotiations. RBS may pay about 500 million pounds ($786 million) to U.S. and U.K. authorities to settle the claims as soon as next week, another two people with knowledge of the negotiations said.

“This opens up a huge can of worms for RBS,” said Simon Maughan, a financial services industry strategist at Olivetree Securities Ltd. in London. If RBS admits criminal liability, “you’re going to get all sorts of people building up class action lawsuits against them. That could prove very costly.”

The shares declined 6 percent, the biggest drop since June 28, and closed at 345.80 pence in London.

The fine would be the second-largest levied by regulators in their investigation into allegations traders at the world’s biggest lenders manipulated submissions used to set the London interbank offered rate. UBS AG, Switzerland’s biggest lender, paid a $1.5 billion fine in December and its Japanese unit pleaded guilty to one count of wire fraud in the U.S. in its December settlement. Barclays Plc was fined 290 million pounds in June and accepted no criminal liability.

Litigation Vulnerability

The RBS talks, which were close to completion earlier this month, have been prolonged as the Justice Department, bolstered by the guilty plea it secured from UBS’s Japanese unit, pressed RBS to plead guilty to the criminal charges as well, the people said. The Scottish bank has so far resisted on concern it could increase its vulnerability to litigation and lead clients to curtail business, according to the Wall Street Journal, which reported the talks earlier.

“Discussions with various authorities in relation to Libor-setting are ongoing,” Michael Strachan, a spokesman for RBS, said. “We continue to cooperate fully with their investigations.” He declined to comment further on the talks with the Justice Department. Rebekah Carmichael, spokeswoman for the Justice Department, declined to comment on the negotiations.

RBS may reduce the bonus pool at its investment bank by more than a third following the allegations of wrongdoing, a person with knowledge of the plan said today.

Bonuses Cut

The lender is poised to set aside about 250 million pounds for bonuses at the division, compared with 390 million pounds for 2011, said the person, who asked not to be identified because a final decision is yet to be taken. RBS plans to recoup between 100 million pounds and 150 million pounds from the bonus pool to offset the fine, people familiar with the matter said last month. The Financial Times reported the cut earlier today.

RBS will also claw back bonuses from those involved in the alleged manipulation of Libor as well as their superiors, up to and including the head of investment bank, John Hourican, the people said. He is expected to resign because he had responsibility for the parts of the company where the alleged wrongdoing occurred, even though he didn’t have direct knowledge of the behavior, the people said.

Libor is calculated by a poll carried out daily on behalf of the British Bankers’ Association that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The top and bottom quartiles of quotes are excluded, and those left are averaged and published for individual currencies before noon in London.

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