European banks pay heavy price for scandals


* Regulators fine Dutch bank in rate-rigging scandal

* Dutch minister attacks "shameless fraud"

* Deutsche Bank, Lloyds profits hit by legal provisions

* UBS forced to hold extra capital to deal with litigation

By Sara Webb and Katharina Bart

AMSTERDAM/ZURICH, Oct 29 (Reuters) - Four European bankspaid a heavy price on Tuesday in a clean-up of the financialindustry, with Rabobank fined $1 billion and three other majorlenders preparing for possibly huge legal costs after a stringof scandals.

Dutch Rabobank said it would pay regulators in the UnitedStates, Britain and the Netherlands 774 million euros after 30employees were involved in "inappropriate conduct" linked tointerest rate manipulation.

Chief executive Piet Moerland resigned, becoming the secondCEO 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 avariety of misdeeds revealed after the financial crisis eruptedin 2008, and the relentless rise in the cost of fines, lawsuitsand compensation shows no sign of abating.

Rabobank is the fifth lender to be fined for manipulatingreference rates such as Libor (London Interbank Offered Rate),which are benchmarks for more than $300 trillion of financialassets. Regulators have now imposed penalties totalling $3.7billion. 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 chargesagainst Rabobank for two years - and drop them if it cooperatedwith investigations which are still under way.

Emails between traders and other staff revealed a culturewhich Moerland acknowledged would arouse indignation. "Don'tworry mate - there's bigger crooks in the market than us guys!"wrote one after submitting an artificially high interest rateintended to distort the calculation of that day's Libor.


Shares in Deutsche Bank, UBS and LloydsBanking Group fell sharply as the cost of paying, oneway or another, for possible lawsuits and fines overshadowedtheir day-to-day performance in the third quarter.

Deutsche and Lloyds said they were setting aside large sumsto deal with future legal costs, while UBS said Swiss financialregulator FINMA had ordered it to hold extra capital in case ithas to pay out more than expected in legal settlements.

"Just as we thought the regulation might be over, back itcomes," said Andrea Williams, European equities fund manager atRoyal London Asset Management, referring to the cost to UBS.

Deutsche, Germany's largest bank, set aside an extra 1.2billion euros to cover potential litigation costs, depressingits quarterly pretax profit to 18 million euros from an expected642 million. Its shares recovered from earlysharp falls and were slightly higher by late afternoon.

Net profit at rival UBS was 577 million Swiss francs ($644million), beating analysts' consensus forecast of 537 million.However, the capital requirement raised fears that it would endup paying billions to deal with claims and fines, sending itsshares 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-soldpayment protection insurance (PPI). Shares in Lloyds were down1.8 percent at 1500 GMT, even though the bank almost doubledunderlying profits in the third quarter.

Lloyds, one-third state-owned after being rescued, said itwas not seeing as great a showdown as it expected in claims frompeople sold insurance that could never benefit them.

The cost of dealing with the scandals is likely to keeprising for the broader industry.

"I'm sure there's a large amount of provisions still tocome," said Rupert Baker, a European equity sales executive atMirabaud Securities, speaking of banks generally.


Deutsche's overall litigation reserves - its war chest todeal with possible legal costs - stands at 4.1 billion eurosafter the charges booked in the third quarter. "We expect thelitigation environment to continue to be challenging," the banksaid in a statement, signalling that the worst may not be over.

The latest charges amounted to 1.163 billion euros, with thelion's share set aside for cases involving Residential MortgageBacked Securities.

These bonds backed by subprime and other risky homemortgages lay at the heart of the financial crisis and aresubject 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 byregulators over possible rate manipulation.

Unlike Barclays and UBS, Deutsche has not yet reached alegal settlement. "The investigations under way have thepotential to result in the imposition of significant financialpenalties and other consequences for the bank," Deutsche said inits third-quarter report.

In Zurich, UBS said FINMA requirements meant the bank'starget of achieving a 15-percent return on equity (ROE) by 2015will 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 worryis that there are more litigation charges."

Several regulators have also launched investigations intothe possible manipulation of foreign exchange markets, and UBSsaid it was also conducting an internal review.

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