By Sara Webb and Katharina Bart
AMSTERDAM/ZURICH (Reuters) - Four European banks paid a heavy price on Tuesday in a clean-up of the financial industry, with Rabobank fined $1 billion (623 million pounds) and three other major lenders preparing for possibly huge legal costs after a string of scandals.
Dutch Rabobank said it would pay regulators in the United States, Britain and the Netherlands 774 million euros after 30 employees were involved in "inappropriate conduct" linked to interest rate manipulation.
Chief executive Piet Moerland resigned, becoming the second CEO of a bank involved in the rate rigging scandal to quit, following Bob Diamond's departure from British bank Barclays last year.
European and U.S. banks are still struggling to cast off a variety of misdeeds revealed after the financial crisis erupted in 2008, and the relentless rise in the cost of fines, lawsuits and compensation shows no sign of abating.
Rabobank is the fifth lender to be fined for manipulating reference rates such as Libor (London Interbank Offered Rate), which are benchmarks for more than $300 trillion of financial assets. Regulators have now imposed penalties totalling $3.7 billion. Seven people have been charged with criminal offences.
Dutch Finance Minister Jeroen Dijsselbloem said Rabobank's "shameless fraud" was a long way from its cooperative origins.
The U.S. Justice Department agreed to defer criminal charges against Rabobank for two years - and drop them if it cooperated with investigations which are still under way.
Emails between traders and other staff revealed a culture which Moerland acknowledged would arouse indignation. "Don't worry mate - there's bigger crooks in the market than us guys!" wrote one after submitting an artificially high interest rate intended to distort the calculation of that day's Libor.
BACK IT COMES
Shares in Deutsche Bank, UBS and Lloyds Banking Group fell sharply as the cost of paying, one way or another, for possible lawsuits and fines overshadowed their day-to-day performance in the third quarter.
Deutsche and Lloyds said they were setting aside large sums to deal with future legal costs, while UBS said Swiss financial regulator FINMA had ordered it to hold extra capital in case it has to pay out more than expected in legal settlements.
"Just as we thought the regulation might be over, back it comes," said Andrea Williams, European equities fund manager at Royal London Asset Management, referring to the cost to UBS.
Deutsche, Germany's largest bank, set aside an extra 1.2 billion euros to cover potential litigation costs, depressing its quarterly pretax profit to 18 million euros from an expected 642 million. Its shares recovered from early sharp falls and were slightly higher by late afternoon.
Net profit at rival UBS was 577 million Swiss francs ($644 million), beating analysts' consensus forecast of 537 million. However, the capital requirement raised fears that it would end up paying billions to deal with claims and fines, sending its shares down 7.7 percent at 1500 GMT.
In Britain, Lloyds set aside another 750 million pounds ($1.21 billion) to compensate customers who were mis-sold payment protection insurance (PPI). Shares in Lloyds were down 1.8 percent at 1500 GMT, even though the bank almost doubled underlying profits in the third quarter.
Lloyds, one-third state-owned after being rescued, said it was not seeing as great a showdown as it expected in claims from people sold insurance that could never benefit them.
The cost of dealing with the scandals is likely to keep rising for the broader industry.
"I'm sure there's a large amount of provisions still to come," said Rupert Baker, a European equity sales executive at Mirabaud Securities, speaking of banks generally.
Deutsche's overall litigation reserves - its war chest to deal with possible legal costs - stands at 4.1 billion euros after the charges booked in the third quarter. "We expect the litigation environment to continue to be challenging," the bank said in a statement, signalling that the worst may not be over.
The latest charges amounted to 1.163 billion euros, with the lion's share set aside for cases involving Residential Mortgage Backed Securities.
These bonds backed by subprime and other risky home mortgages lay at the heart of the financial crisis and are subject to a number of lawsuits in the United States.
More than a dozen banks and brokerages, including Deutsche, J.P. Morgan and Citigroup, are under investigation by regulators over possible rate manipulation.
Unlike Barclays and UBS, Deutsche has not yet reached a legal settlement. "The investigations under way have the potential to result in the imposition of significant financial penalties and other consequences for the bank," Deutsche said in its third-quarter report.
In Zurich, UBS said FINMA requirements meant the bank's target of achieving a 15-percent return on equity (ROE) by 2015 will be pushed back by at least a year.
Kian Abouhossein, a London-based banking analyst with J.P. Morgan who rates the stock "overweight", said: "The real worry is that there are more litigation charges."
Several regulators have also launched investigations into the possible manipulation of foreign exchange markets, and UBS said it was also conducting an internal review.
(Additional reporting by Thomas Atkins, Edward Taylor and Arno Schuetze in Frankfurt and Sinead Cruise, Steve Slater, Matt Scuffham and Sudip Kar-Gupta in London; Writing by Laura Noonan and Kirstin Ridley; Editing by David Stamp and Alastair Macdonald)