November 18, 2017

China’s Credit Squeeze Relaxes as Interest Rates Drop

The central government made no official announcement on the situation, and it was unclear whether policy makers had intervened, but short-term interest rates fell sharply Friday from a day earlier, when they had reached some of the highest levels in a decade.

Still, the Chinese financial markets remained under pressure. Rates for institutions that were seeking interbank funding on Friday were still substantially higher than a few weeks ago. Financial experts expressed skepticism that the government would do more to aid banks that were temporarily starved for cash.

The reluctance of policy makers to act comes amid growing concerns that China’s economy is weakening and that the government has abandoned its longstanding policy of responding to any hint of an economic slowdown by expanding credit.

By signaling a new restraint in monetary policy, Beijing seems to be tackling what analysts say is the growing risk of poor lending practices and overcapacity in the economy.

Louis Kuijs, an economist at the Royal Bank of Scotland, said Friday that the government’s response to weak cash flows in the interbank market, where banks make short-term loans to one another, was a sign of the government’s new resolve.

“It was the shift in the stance of the P.B.C. that made all the difference,” he said, referring to the People’s Bank of China, the central bank, acting in a way that had sent interest rates higher. “The government at the moment wants to signal, ‘we’re working on reform — we’re not interested in short-term stimulus,’ like China did in the past.”

The apparent decision not to pump more cash into the economy rocked China’s financial markets Thursday. Investor worries were compounded by newly released economic data indicating that manufacturing activity was contracting and export and job growth were tepid.

As credit markets began to freeze up and mistrust among banks spread, rumors circulated of defaults. Late Thursday, the Bank of China, one of the country’s biggest lenders, issued a statement on its Web site denying local news reports that it had defaulted on interbank payments.

By late Friday, the markets had settled somewhat. The overnight lending rate between banks had dropped to 8.49 percent, down from a record high of 13.44 percent on Thursday, but still much higher than last month’s levels of less than 4 percent.

Another benchmark rate for borrowing costs between banks, the seven-day repurchase rate, opened Friday at 8.1 percent, briefly soared as high as 25 percent and closed at 5.5 percent.

Few analysts expect the liquidity strains to lead to a financial or economic crisis because Beijing has the tools to avert a serious slowdown, with its tight control over the banking and financial sector.

But experts say the risks are rising and the choices are grim: if the government pulls back on lending, the economy could suffer in the short term; if it pumps more money into the economy to avert a slowdown, it could do long-term damage to an economy that many believe is already suffering from overinvestment.

There are also growing concerns about China’s huge shadow banking sector, with some financial experts warning of hidden liabilities tied up in local government projects, as well as the so-called wealth management products that are sold to investors through banks and trust funds but do not appear on the financial companies’ balance sheets.

“Persistent tight liquidity conditions in China’s financial sector could constrain the ability of some banks to meet upcoming obligations on maturing wealth management products on a timely basis,” the credit ratings agency Fitch Ratings said in a report Friday.

Joe Zhang, a longtime banker and the author of “Inside China’s Shadow Banking: the Next Subprime Crisis?,” said the decision by China’s central bank to discipline banks by allowing the rates to rise this week was necessary.

“Effectively, they are telling commercial banks to go and sort out their problems,” he said in a telephone interview Friday. “The banks have lent out too much money. And what happens over time? You go from prime to subprime to silly loans. This is what happened with the U.S. subprime crisis. Banks start lending to bad projects. We’ve been too reckless.”

Neil Gough contributed reporting from Hong Kong.

Article source: http://www.nytimes.com/2013/06/22/business/global/chinas-bank-lending-crunch-eases.html?partner=rss&emc=rss

DealBook: Co-operative Bank Turns to Bondholders to Fill Capital Shortfall

LONDON – The British lender Co-operative Bank announced plans on Monday to raise an additional £1.5 billion ($2.4 billion) to replenish a capital shortfall.

Under the terms of the deal, junior bondholders will be asked to swap their debt securities for shares in the Co-operative Bank. The agreement represents the first time that a so-called “bail in” of bondholders has been used to recapitalize a British bank since the financial crisis began.

The move contrasts with previous efforts by local banks to raise capital, including the multibillion-dollar state bailouts of lenders like the Royal Bank of Scotland and the Lloyds Banking Group.

By requiring bondholders to exchange their debt securities for shares, Co-operative Bank is trying to avoid turning to the British government for help.

The Co-operative Bank, whose credit rating was downgraded last month to junk status by Moody’s Investors Service because of questions over its capital reserves, said the agreement would increase its so-called common Tier 1 equity ratio, a measure of a firm’s ability to weather financial shocks, to 9 percent by the end of the year.

The Prudential Regulatory Authority, a British regulator, has called for all of the country’s banks to have a common Tier 1 equity ratio of at least 7 percent by the end of the year under the accountancy rules known as Basel III.

British lenders must raise a combined £25 billion by the end of the year to meet the capital shortfall. Regulators will announce details on Thursday of how much each bank must raise by the end of the year.

The Co-operative Bank said on Monday that it planned to raise £1 billion this year through the bondholder swap, and increase its reserves by an additional £500 million next year.

“This announcement is good news for the Co-operative Group, the Co-operative Bank, its customers,” Euan Sutherland, chief executive of the Co-operative Group, said in a statement. “This solution, under which they will own a significant minority stake in the bank, will then allow them to share in the upside of the transformation of the bank.”

As part of the move to raise capital, the Co-operative Bank also plans to sell its general insurance unit. This year, the bank sold its life insurance and asset management businesses to the British pension company Royal London for around £220 million.

The Co-operative Bank’s financial difficulties stem from a mistimed acquisition in 2009 of a local rival, Britannia Building Society, that left the bank with a large pool of delinquent commercial real estate loans.

The bank also ran into trouble this year when its plan to buy part of the Lloyds Banking Group’s branch network collapsed. The move was an effort to increase its capital base, while also expanding across Britain to compete with larger lenders like Barclays and HSBC.


This post has been revised to reflect the following correction:

Correction: June 17, 2013

An earlier headline with this article misspelled the name of the bank. It is Co-operative Bank, not Co-operaritive Bank. The article also misspelled a company name. It is Moody’s Investors Service, not Moody’s Investor Services.

Article source: http://dealbook.nytimes.com/2013/06/17/co-operaritive-bank-turns-to-bondholders-to-fill-capital-shortfall/?partner=rss&emc=rss

DealBook: R.B.S. Chief to Step Down

Stephen Hester, chief of the Royal Bank of Scotland.Oli Scarff/Getty ImagesStephen Hester, chief of the Royal Bank of Scotland.

LONDON – Stephen Hester, the chief executive of Royal Bank of Scotland, announced on Wednesday that he was leaving the bank.

Mr. Hester helped navigate the bank after it received a multibillion-dollar bailout from the British government during the financial crisis.

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He has overseen a major overhaul of R.B.S., which has shed hundreds of billions of dollars of assets and shrunk its investment banking operations.

Earlier this year, R.B.S. said that it hoped to be in a position by the middle of 2014 that would allow the government to start reducing its 81 percent stake in the bank.

Mr. Hester said he would have liked to have overseen the privatization process, but the board had decided that a new chief executive would be needed to lead that effort. Analysts said it could take up to eight years to complete the process.

“While leading that process would be the end of an incredible chapter for me, ideally for the company it should be led by someone at the beginning of their journey,” Mr. Hester said in a statement. “I will therefore step down at the end of this year.”

Mr. Hester is expected to depart with a salary and pension package worth up to $8.8 million.

Article source: http://dealbook.nytimes.com/2013/06/12/r-b-s-chief-to-step-down/?partner=rss&emc=rss

DealBook: Pressure in Britain Over What to Do With Bailed-Out Banks

Justin Welby, the archbishop of Canterbury, urged a bank split.Pool photo by Jack HillJustin Welby, the archbishop of Canterbury, urged a bank split.

The archbishop of Canterbury, a former chancellor of the Exchequer and the outgoing governor of the Bank of England are unusual comrades in arms.

Yet, the three stalwarts of the British establishment — Justin Welby, Nigel Lawson and Mervyn King — are all calling for the breakup of the part-nationalized Royal Bank of Scotland.

They are part of a growing debate in Britain about what to do with the bank and its rival, the Lloyds Banking Group, which received more than $103 billion combined in rescue bailouts during the financial crisis.

Now, nearly five years after British taxpayers first took stakes in the lenders, the government is preparing to reduce its holdings before the next general election, which is expected in early 2015. The government owns 81 percent of R.B.S. and 39 percent of Lloyds.

Yet, unlike the share sales in financial giants like Citigroup that allowed the United States government to make a profit, the prospective offerings in Britain may be more difficult.

The two banks are still cleaning up their balance sheets and selling off unwanted assets that could put off new investors. Both continue to come under political pressure to increase potentially risky lending to the struggling British economy. And the timing of any share sale, which could come as early as next year, may lead to losses for British taxpayers — potentially angering voters.

“As we move closer to an election, the share prices of R.B.S. and Lloyds will become more scrutinized,” said Peter Hahn, a banking professor at the Cass Business School in London. “Whoever is in government, selling shares in these banks will be a top priority.”

Liz Morley, a representative for UKFI, the government agency that is in charge of managing the bank holdings, declined to comment for this article.

The British government’s quandary over the banks stands in contrast with the experience of the United States Treasury Department, which reduced the government’s stakes in the big banks more quickly.

Elisabeth Rudman, an analyst with the credit rating firm DBRS, said the two British banks were in much worse shape because of the financial crisis than their American counterparts. R.B.S. was not only burdened by its participation in the acquisition of the Dutch lender ABN Amro, but it had large exposure to imploding real estate markets like Ireland.

Nigel Lawson, left, the former chancellor of the Exchequer, and Mervyn King, the former Bank of England governor.Clive Brunskill/Getty Images and Issei Kato/ReutersNigel Lawson, left, the former chancellor of the Exchequer, and Mervyn King, the former Bank of England governor.

The critical element in the British government’s effort to shed its banks stakes is timing. Later this month, George Osborne, the current chancellor of the Exchequer, will present his strategy to return the two banks to the private sector. His plan will come soon after the findings of a British parliamentary committee in the middle of June that will outline how the firms could be privatized. Lawmakers remain divided over how the banks’ should be privatized, with many of the committee members calling for the breakup of R.B.S. to carve out the most risky assets.

Those in favor of a split say that freeing R.B.S. from its worst-performing assets would allow the bank to lend more, strengthen the banking system and help Britain’s economic recovery. Those against the breakup argue that it would cost both time and money that would be better spent letting the bank continue with its planned overhaul.

To connect banks with local communities could involve “recapitalizing at least one of our major banks and breaking it up into regional banks,” Archbishop Welby, a former oil executive who sits on the parliamentary committee, said in a speech on April 21.

For Mr. Osborne, planning the offerings will be precarious.

If the British government sells its stakes too soon, it could book a loss that might not sit well with voters. But if the government waits too long to sell, it could deter potential investors from buying the shares. It also may reverse the firms’ recent share price rise that have made the banks’ stocks some of the best performers in the FTSE 100-stock index over the last 12 months.

“I get confused by all the talk about waiting,” said Ian Gordon, a banking analyst with Investec in London, adding that the British government should sell the stakes tomorrow. “Can we sell the shares now? Of course we can.”

The fortunes of the two British banks have certainly improved since they received multibillion-dollar bailouts.

R.B.S. has been gradually digging itself out of its ill-judged ABN Amro acquisition in 2007. The bank, based in Edinburgh, has shed billions of dollars from its balance sheet and cut around 40,000 jobs over the last five years. The firm has also trimmed its investment banking operations, which came under scrutiny this year after R.B.S. was forced to pay a $612 million fine connected to a rate-rigging scandal.

Lloyds, which already is Britain’s largest mortgage lender, has refocused its efforts on the British retail banking sector. The bank’s chief executive, António Horta-Osório, announced a £1.5 billion net profit in the first quarter of 2013, compared with a £5 million loss in the same period last year.

Analysts say the rise in earnings is mostly driven by cost reductions, a fall in delinquent loans and fast-tracked asset sales like the disposal of a portfolio of real estate-backed securities in the United States for £3.3 billion last month to a number of American investors, including Goldman Sachs.

Market participants are now centering their attention on when the British government will start to reduce it stakes.

R.B.S.’s chairman, Philip Hampton, has said the bank would like the British government to start selling shares from the middle of next year, though the firm’s current share price is around 35 percent below what British taxpayers paid for their holding. Lloyds’ stock price is slightly above the government’s so-called break-even point, though bankers caution that any offering will be dependent on the health of the broader financial markets.

“Bringing too many shares to market could easily scare off investors,” said a prominent investment banker at a rival firm in London, who spoke on the condition of anonymity because he was not authorized to speak publicly. “When it comes to reducing the government’s stake, timing will be everything.”

Some leading voices in Britain are also calling for restraint.

Alistair Darling, the former chancellor of the Exchequer who led the bailouts of R.B.S. and Lloyds, said the government would make a mistake if it were to rush a sale of shares before the next election. Mr. Darling, a Labour politician who opposes the breakup of R.B.S., said the current government could wait at least another 18 months before selling off its stakes, but must clarify its plans to avoid creating confusion with potential investors.

“A clear statement is needed,” Mr. Darling said. “The longer this drags on, the worse this is going to get.”

For any prospective share sale in the two banks to be a success, the British government must convince voters that the offerings would benefit the economy after taxpayers spent billions of dollars to rescue the two lenders.

Just outside an R.B.S. branch in central London on Thursday, many seemed unconvinced that privatizing the bank would help to jump-start Britain’s recovery.

“I can’t see it making much difference,” said Sarah Mulligan, an I.T. consultant on her way to a meeting in London’s financial district. “Changing who owns the banks won’t necessarily get them lending again.”

A version of this article appeared in print on 06/07/2013, on page B7 of the NewYork edition with the headline: Pressure in Britain Over What to Do With Bailed-Out Banks.

Article source: http://dealbook.nytimes.com/2013/06/06/pressure-in-britain-over-what-to-do-with-bailed-out-banks/?partner=rss&emc=rss

DealBook: R.B.S. Prepares to Sell Shares as Profit Surges

The Royal Bank of Scotland said fines from its role in a rate-rigging scandal totaled $612 million.Warren Allott/Agence France-Presse — Getty ImagesThe Royal Bank of Scotland said fines from its role in a rate-rigging scandal totaled $612 million.

6:03 a.m. | Updated

LONDON — The Royal Bank of Scotland signaled that it was moving closer to privatization on Friday as the bank reported its first quarterly profit since 2011.

The bank, which is 81 percent owned by the British taxpayer after receiving a multibillion-dollar bailout during the financial crisis, said net profit in the three months through March 31 was £393 million, or $611 million, compared with a £1.5 billion loss in the same period last year, beating analysts’ estimates. The firm benefited from a £249 million one-off gain on the value of its own debt.

Since 2008, the bank has been slashing assets, reducing costs and trimming its exposure to risky trading activity in a bid to bolster its profitability, and return taxpayer funds.

The firm, based in Edinburgh, plans to sell a stake in the Citizens Financial Group, the American lender it bought in 1988, while it also has announced the listing of part of its British branch network and has sold shares its local insurance unit, Direct Line.

The bank’s top executives said on Friday that the overhaul would be mostly complete by next year, which would allow the British government to start reducing its holding in the bank.

“What we want to do is have a business that’s performing well for its customers so we can write a prospectus with the government enabling the government to start selling shares from the middle of 2014,” the bank’s chairman, Phillip Hampton, said. “It could be earlier, that’s a matter for the government.”

The bank’s chief executive, Stephen Hester, told reporters on Friday that he had not held recent discussions with United Kingdom Financial Investments, the government entity created in 2008 to recover taxpayers’ investments in both the Royal Bank of Scotland and the Lloyds Banking Group, which had to be bailed out during the financial crisis.

Mr. Hester added that the initial price of the shares may be below what the British government paid for them in 2008, but added that he expected the average share price to be above the government’s 407 pence-a-share break even point.

“Because of the size of the state shareholding in R.B.S. and Lloyds, selling these shares will take a number of years,” Mr. Hester said on Friday. “The average sale price will likely be in excess of what was paid.”

Shares in the Royal Bank of Scotland fell 6.4 percent, to 288 pence, in morning trading in London on Friday.

As part of its overhaul, the British bank said that it had continued to reduce its investment banking division in the first quarter of the year, while also setting aside less money to cover delinquent loans. The reduction in its overall operations hit the firm’s operating profit, which fell 28 percent, to £826 million, in the first quarter of the year compared with the same period in 2012.

After an international expansion before the financial crisis, the bank is refocusing its efforts on retail and commercial banking, which generates the majority of the firm’s quarterly pretax earnings.

“The core franchise value of one of the dominant U.K. retail and wholesale banks is coming to the fore,” Sanford Bernstein analysts said in a research note to investors on Friday.

The bank’s chief, however, warned that the sluggish British economy still weighed on earnings, and that the firm’s reorganization was not yet complete.

“We are running hard to stand still,” Mr. Hester said. “There’s no momentum in the profits until the economy recovers.”

Article source: http://dealbook.nytimes.com/2013/05/03/rbs-prepares-to-sell-shares-as-net-profit-surges/?partner=rss&emc=rss

DealBook: Senior R.B.S. Executive in Japan Expected to Resign in Libor Scandal

Japanese authorities are seeking to punish Royal Bank of Scotland over its role in Libor manipulation.Peter Macdiarmid/Getty ImagesJapanese authorities are seeking to punish Royal Bank of Scotland over its role in manipulating benchmark rates.

LONDON – A senior executive at the Royal Bank of Scotland’s Japanese investment banking unit is expected to resign in the wake of a rate-rigging scandal, according to a person with direct knowledge of the matter.

Ryusuke Otani, who runs R.B.S.’s investment banking business in Japan, will probably step down by the end of the week, added the person, who spoke on the condition of anonymity because he was not authorized to speak publicly.

The resignation of Mr. Otani, a former Citigroup banker, follows moves by Japanese authorities to punish Royal Bank of Scotland over its role in the manipulation of the London interbank offered rate, or Libor.

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The Securities and Exchange Surveillance Commission of Japan asked local regulators last week to issue a so-called administrative action against R.B.S., which is based in Edinburgh, after some of its traders attempted to alter a key benchmark rate for financial gain.

The Royal Bank of Scotland, in which the government holds a stake of about 81 percent after providing a bailout during the financial crisis, reached a $612 million settlement in February with American and British authorities in connection with the Libor scandal. As part of the agreement, the firm’s Japanese unit was required to plead guilty to criminal wrongdoing.

Global authorities already have fined three banks – Barclays, UBS and Royal Bank of Scotland – a collective $2.6 billion for their roles in the manipulation of Libor.

Other major financial institutions, including Citigroup and Deutsche Bank, are still under investigation in the rate-rigging scandal, which affected complex financial products worth trillions of dollars.

In the latest regulatory action against Royal Bank of Scotland, Japanese authorities said on April 5 that some of the firm’s traders had tried to profit from altering rate submissions to yen Libor from 2006 to 2010. The British bank also was sanctioned for failing to spot the wrongdoing over the five-year period.

Japanese regulators have taken similar steps against UBS and Citigroup after investigations found that some of the banks’ traders had attempted to manipulate key benchmark rates in the country.

Royal Bank of Scotland’s chief executive, Stephen Hester, apologized in February for the bank’s role in the scandal, adding that six people had been fired because of their role in manipulating rates. An additional eight bankers left before the wrongdoing was discovered, while six other individuals have been disciplined but remain with the bank.

A derivatives trader, Simon Green, was fired last month in connection to the Libor scandal, according to a person with direct knowledge of the matter.

A spokesman for Royal Bank of Scotland declined to comment.

Article source: http://dealbook.nytimes.com/2013/04/11/senior-r-b-s-executive-in-japan-expected-to-resign-after-libor-scandal/?partner=rss&emc=rss

DealBook: R.B.S. to Pay $612 Million Over Rate Rigging

A branch of the Royal Bank of Scotland in Edinburgh.David Moir/ReutersA branch of the Royal Bank of Scotland in Edinburgh.

LONDON – The Royal Bank of Scotland on Wednesday struck a combined $612 million settlement with American and British authorities over accusations that it manipulated interest rates, the latest case to emerge from a broad international investigation.

In an embarrassing blow to the bank, its Japanese subsidiary also pleaded guilty to criminal wrongdoing in its settlement with the Justice Department. The R.B.S. subsidiary, a hub of rate-rigging activity, agreed to a single count of felony wire fraud to resolve the case.

The settlement reflects the Justice Department’s renewed vigor for punishing banks ensnared in the rate manipulation case. In December, a Japanese subsidiary of UBS pleaded guilty to felony wire fraud as part of a larger settlement, representing the first unit of a big bank to agree to criminal charges in more than a decade.

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As authorities built the R.B.S. case, they seized on a series of incriminating yet colorful e-mails that highlighted an effort to influence the rate-setting process, a plot that spanned multiple currencies and countries from 2006 to 2010. One senior trader expressed disbelief at reaping lucrative profits from the scheme, saying “it’s just amazing” how rate “fixing can make you that much money,” according to the government’s complaint. Another trader, after pressuring a colleague to submit a certain rate, offered a reward of sorts: “I would come over there and make love to you.”

In a statement on Wednesday, the American regulator leading the case slammed the bank for manipulating benchmarks like the London Interbank Offered Rate, or Libor. The regulator, the Commodity Futures Trading Commission, noted that R.B.S. employees “aided and abetted” UBS and other firms in the rate-rigging scheme and continued to run afoul of the law, though more covertly, even after learning of a federal investigation.

“The public is deprived of an honest benchmark interest rate when a group of traders sits around a desk for years falsely spinning their bank’s Libor submissions, trying to manufacture winning trades. That’s what happened at R.B.S.,” David Meister, the enforcement director of the commission, said in the statement.

Libor Explained

The settlement represents the latest setback for Royal Bank of Scotland, which has struggled to shake the legacy of the 2008 financial crisis. The British firm already has put aside $2.7 billion to compensate customers who were inappropriately sold loan insurance over recent years. On Jan. 31, British regulators also called on the bank and other local rivals to review the sale of interest-rate hedging products after more than 90 percent of a sample were found to have been sold improperly.

The broader rate-rigging case has centered on how much the Royal Bank of Scotland and a dozen other banks, including Citigroup and HSBC, charge each other for loans. Such benchmarks, including Libor, help determine the borrowing costs for trillions of dollars in financial products like corporate loans, mortgages and credit cards.

But the Royal Bank of Scotland, like many of its competitors, corrupted the process. Government complaints filed over the last year outlined a scheme in which banks reported false rates to lift trading profits and deflect concerns about their health during the crisis.

Authorities filed the first Libor case in June, extracting a $450 million settlement with the British bank Barclays. In December, UBS agreed to a record $1.5 billion settlement with European regulators, the Justice Department and the American regulator that opened the case, the Commodity Futures Trading Commission. The Justice Department’s criminal division, which secured the guilty plea from the bank’s Japanese unit, also filed criminal charges against two former UBS traders.

Some of the world’s largest financial institutions remain caught in the cross hairs of the case. Deutsche Bank has set aside an undisclosed amount to cover potential penalties.

While foreign banks have received the brunt of the scrutiny to date, an American institution could be among the next to settle. Citigroup and JPMorgan Chase are under investigation.

In the $612 million Royal Bank of Scotland case, authorities levied the second-largest fine in the multiyear investigation into rate manipulation.

The fine included a $325 million penalty from the trading commission and a £87.5 million ($137 million) sanction from the Financial Services Authority, the British regulator, marking one of the largest financial penalties ever from British authorities. The Justice Department, for its part, imposed a $150 million fine as part of a deferred-prosecution agreement with R.B.S. In addition to wire fraud, the Justice Department cited the bank for its role in a “price-fixing conspiracy” that violated anti-trust laws.

R.B.S., based in Edinburgh, had aimed to avert the guilty plea for its Japanese subsidiary. But the Justice Department’s criminal division declined to back down, and the bank had little leverage to push back. If it had balked at a plea deal, the Justice Department could have moved to indict the subsidiary.

“Like with Barclays and UBS, the settlement with R.B.S. is much more than a slap on the wrist,” said Bart Chilton, a member of the trading commission who is critical of soft fines on big banks.

In the wake of the settlement, Royal Bank of Scotland is shaking up its management team as it moves to repair its bruised image. John Hourican, the firm’s investment banking chief, resigned on Wednesday, and agreed to forgo some of his past and current compensation totaling around $14.1 million. While Mr. Hourican was not implicated in the scandal, senior executives said he was taking blame for wrongdoing in his division.

“John is the right senior person to take responsibility for this,” the bank’s chairman, Philip Hampton, told reporters on Wednesday.

Royal Bank of Scotland, in which the government holds an 82 percent stake after providing a $73 billion bailout in 2008, also plans to claw back bonuses and other long-term compensation totaling $471 million to help pay for the rate-rigging penalty. The bank will will primarily use the figure to pay the fines from U.S. authorities, while penalties from the British regulator will be recycled back to the British government.

At a press conference in central London on Wednesday, Stephen Hester, the bank’s chief executive, condemned the illegal behavior of some of the firm’s employees, but acknowledged that Royal Bank of Scotland did not monitor its Libor submissions closely enough to catch the wrongdoing.

Mr. Hester, who has led the bank through a series of scandals and has been dogged by politicians’ demands for reductions in bonuses, admitted that the rate-rigging episode had placed the bank under a lot of strain.

“It is one of the most difficult moments over the entire period,” he said.

Mr. Hester, a former chief executive of the property developer British Land, has focused on paring back the bank’s operations. The C.E.O. has cut more than 30,000 job cuts since 2008, attempted to spin-off of the mergers and acquisitions unit and cut the size of its balance sheet by £600 billion since 2009. Mr. Hester also waved his $1.5 million bonus for 2011 after coming under pressure from British politicians.

In the Libor case, the wrongdoing at R.B.S. occurred on smaller scale than at other banks. The breach, authorities say, was limited to Libor submitters and traders who sought to bolster their bottom line. By comparison, top executives at Barclays knew the bank was lowballing its Libor rates to assuage concerns about its high borrowing costs.

R.B.S., which admitted that 21 of its employees altered the firm’s Libor submissions for financial gain on hundreds of occasions, either disciplined or fired most of the employees. The rest left before they were implicated. In the UBS case, the trading commission cited more than 2,000 instances of illegal acts involving dozens of employees.

Still, the government complaints against R.B.S. portray a permissive culture that allowed rate-rigging to persist for some four years.

The bank’s own records captured the scheme in striking detail, revealing how traders pressured other employees to submit certain Libor figures. Submitters and traders sat in earshot of each other on a trading desk in London, forming what authorities termed a “cozy ring.”

The bank eventually separated the employees, forcing them to communicate over e-mail and phone. A flurry of instant messages ensued, some more vulgar than others.

A trader noted in September 2009 that his requests for rates moved up and down, “like a whores drawers.” Another employee acknowledged that the Libor rate-setting process is “a cartel now.”

To get their way with employees who submitted Libor rates, traders promised “love” and affection. Others merely offered steak and sushi. One trader resorted to begging, invoking a plea of “pretty please.”

The collusion was not limited to inside Royal Bank of Scotland.

Between 2008 and 2009, the bank’s traders cooperated with other banks, including the Swiss financial giant UBS, and brokerage firms to manipulate Libor, according to regulatory filings. To ensure rate submissions at other banks benefited their own trading positions, some of Royal Bank of Scotland’s staff paid brokers more than a combined $300,000 in kickbacks over the time period to influence traders at other firms on their behalf.

When authorities started investigating, the traders adapted their tactics. One employee noted that federal authorities “are all over us.”

The concerns prompted a more covert approach. In September 2010, after the trading commission ordered an internal investigation at R.B.S., a derivatives trader urged a colleague who requested a higher Libor rate to send “no emails anymore.”

Two months later, a Libor submitter rebuffed an instant message request to manipulate rates. But then, the submitter spoke with the trader via telephone, explaining “we’re not allowed to have those conversations” over instant message.

Their call was recorded. The employees laughed, according to a transcript, and the submitter reassured the trader that he would fulfill the request: “Leave it with me, and uh, it won’t be a problem.”

The lobbying paid off. When employees submitted bogus rates, government authorities said, Libor was altered.

Lanny Breuer, the head of the Justice Department’s criminal division, called the actions a “stunning abuse of trust.”

He also warned of coming actions against other big banks. “Our message is clear: no financial institution is above the law.”

Article source: http://dealbook.nytimes.com/2013/02/06/as-unit-pleads-guilty-r-b-s-pays-612-million-over-rate-rigging/?partner=rss&emc=rss

DealBook: As Unit Pleads Guilty, R.B.S. to Pay $612 Million Over Rate Rigging

A branch of the Royal Bank of Scotland in Edinburgh.David Moir/ReutersA branch of the Royal Bank of Scotland in Edinburgh.

LONDON – The Royal Bank of Scotland on Wednesday struck a combined $612 million settlement with American and British authorities over accusations that it manipulated interest rates, the latest case to emerge from a broad international investigation.

In an embarrassing blow to the bank, its Japanese subsidiary also pleaded guilty to criminal wrongdoing in its settlement with the Justice Department. The R.B.S. subsidiary, a hub of rate-rigging activity, agreed to a single count of felony wire fraud to settle the case.

The settlement reflects the Justice Department’s renewed vigor for punishing banks ensnared in the rate manipulation case. In December, a Japanese subsidiary of UBS pleaded guilty to felony wire fraud as part of a larger settlement, representing the first unit of a big bank to agree to criminal charges in more than a decade.

As authorities built the R.B.S. case, they seized on a series of incriminating yet colorful e-mails that highlighted an effort to influence the rate-setting process, a plot that spanned multiple currencies and countries from 2006 to 2010. One senior trader expressed disbelief at reaping lucrative profits from the scheme, saying “it’s just amazing” how rate “fixing can make you that much money,” according to the government’s complaint. Another trader, after pressuring a colleague to submit a certain rate, offered a reward of sorts: “I would come over there and make love to you.”

In a statement on Wednesday, the American regulator leading the case slammed the bank for manipulating benchmarks like the London Interbank Offered Rate, or Libor. The regulator, the Commodity Futures Trading Commission, noted that R.B.S. employees “aided and abetted” other banks in the rate-rigging scheme and continued to run afoul of the law, though more covertly, even after learning of a federal investigation.

“The public is deprived of an honest benchmark interest rate when a group of traders sits around a desk for years falsely spinning their bank’s Libor submissions, trying to manufacture winning trades. That’s what happened at R.B.S.,” David Meister, the enforcement director of the commission, said in the statement.

Libor Explained

The settlement represents the latest setback for Royal Bank of Scotland, which has struggled to shake the legacy of the 2008 financial crisis. The British firm already has put aside $2.7 billion to compensate customers who were inappropriately sold loan insurance over recent years. On Jan. 31, British regulators also called on the bank and other local rivals to review the sale of interest-rate hedging products after more than 90 percent of a sample were found to have been sold improperly.

The broader rate-rigging case has centered on how much the Royal Bank of Scotland and a dozen other banks, including Citigroup and HSBC, charge each other for loans. Such benchmarks, including Libor, help determine the borrowing costs for trillions of dollars in financial products like corporate loans, mortgages and credit cards.

But the Royal Bank of Scotland, like many of its competitors, corrupted the process. Government complaints filed over the last year outlined a scheme in which banks reported false rates to lift trading profits and deflect concerns about their health during the crisis.

Authorities filed the first Libor case in June, extracting a $450 million settlement with the British bank Barclays. In December, UBS agreed to a record $1.5 billion settlement with European regulators, the Justice Department and the American regulator that opened the case, the Commodity Futures Trading Commission. The Justice Department’s criminal division, which secured the guilty plea from the bank’s Japanese unit, also filed criminal charges against two former UBS traders.

Some of the world’s largest financial institutions remain caught in the cross hairs of the case. Deutsche Bank has set aside an undisclosed amount to cover potential penalties.

While foreign banks have received the brunt of the scrutiny to date, an American institution could be among the next to settle. Citigroup and JPMorgan Chase are under investigation.

The Royal Bank of Scotland case represents the second-largest fine levied in the multiyear investigation into rate manipulation.

The Justice Department imposed a $150 million fine as part of a deferred-prosecution agreement with R.B.S., while the trading commission’s financial penalty reached $325 million. The Financial Services Authority, the British regulator, also levied a £87.5 million ($137 million) fine against the firm, one of the largest financial penalties ever from British authorities.

R.B.S., based in Edinburgh, had aimed to avert the guilty plea for its Japanese subsidiary. But the Justice Department’s criminal division declined to back down, and the bank had little leverage to push back. If it had balked at a plea deal, the Justice Department could have moved to indict the subsidiary.

“Like with Barclays and UBS, the settlement with R.B.S. is much more than a slap on the wrist,” said Bart Chilton, a commissioner at the trading commission who is a critic of soft fines on big banks.

In the wake of the settlement, Royal Bank of Scotland is shaking up its management team as it moves to repair its bruised image. John Hourican, the firm’s investment banking chief, resigned on Wednesday, and agreed to forgo some of his past compensation.

Royal Bank of Scotland, in which the government holds an 82 percent stake after providing a $73 billion bailout in 2008, also plans to claw back bonuses totaling $471 million to help pay for the rate-rigging penalty.

“We condemn the behavior of the individuals who sought to influence some Libor currency settings at our bank from 2006 to 2010. There is no place at R.B.S. for such behavior,” Stephen Hester, the bank’s chief executive, said in a statement on Wednesday. “Libor manipulation is an extreme example of a selfish and self-serving culture that took hold in parts of the banking industry during the financial boom.”

Article source: http://dealbook.nytimes.com/2013/02/06/as-unit-pleads-guilty-r-b-s-pays-612-million-over-rate-rigging/?partner=rss&emc=rss

DealBook: Japanese Firms to Pay $7.3 Billion for R.B.S. Aircraft Leasing Unit

Tomohiro Ohsumi/Bloomberg News

7:20 p.m. | Updated

LONDON — Japanese bidders led by the Sumitomo Mitsui Financial Group agreed on Tuesday to acquire the Royal Bank of Scotland’s aircraft leasing business for $7.3 billion — the biggest divestiture yet by the British bank since it was bailed out three years ago.

R.B.S. had been trying to sell the unit for months, and the final bidders included Wells Fargo and China Development Bank, according to a person with knowledge of the matter. The person spoke on condition of anonymity because bidders in the auction were not supposed to be disclosed.

Sumitomo Mitsui Financial, the group holding company, together with the trading company Sumitomo Corporation, a joint venture partly owned by Sumitomo Mitsui, said R.B.S. Aviation Capital’s operations would be merged with their own joint leasing business, the S.M.F.L. Aircraft Capital Corporation.

The Japanese companies said in a statement that the deal would allow them to “further expand and develop the business in Asia,” which has seen a proliferation of so-called low cost carriers in recent years, as well as in other emerging markets.

International passenger demand in the Asia-Pacific region is expected to grow 7.6 percent by 2014, according to the International Air Transport Association, an industry group. Passenger demand in North America is expected to increase 4.9 percent in the same period.

The Japanese companies “are increasing their involvement in the aircraft financing business by taking advantage of an opportunity when the market is depressed,” said Paul Sheridan, head of Asia consultancy at aerospace advisory firm Ascend in Hong Kong, who has previously worked for R.B.S. Aviation Capital . “The R.B.S. portfolio is one of the best in the market. Everyone is looking to Asia for future growth.”

R.B.S. Aviation Capital, based in Dublin, owns, manages or has orders for 329 commercial aircraft, according to R.B.S.

Under the terms of the deal, Sumitomo Mitsui Financial will own approximately 60 to 70 percent of R.B.S. Aviation Capital, while the Sumitomo Corporation will control the remainder. The deal is expected to close by end of the third quarter.

By the close of trading in Tokyo, the share price of both Sumitomo Mitsui Financial and the Sumitomo Corporation had risen about 1 percent. By midday in London, R.B.S.’s stock price was up almost 4 percent.

The sale of the aircraft leasing unit is part of a move by R.B.S. to reduce its business operations and shed so-called noncore assets. The British government holds an 82 percent stake in R.B.S. as a result of bailouts in 2008 and 2009.

The bank said it would use the proceeds of the transaction to strengthen its core Tier 1 ratio, a measure of a bank’s ability to weather financial shocks, and to reduce its reliance on the wholesale financing markets. At the end of the third quarter of 2011, that ratio stood at 11.3 percent.

Bruce Van Saun, the R.B.S. group finance director, said in a statement that the deal illustrated “our progress in reducing our noncore portfolio and returning the group to a position of strength.”

Last week, the bank, based in Edinburgh, said it planned to eliminate 3,500 jobs in its investment banking division over the next three years in response to volatility in global financial markets.

R.B.S. already had eliminated 2,000 jobs in that unit in the second half of 2011, according to a company statement. The bank has shed more than 30,000 employees since 2008.

The bank also announced plans to revamp its wholesale banking division, as well as seek buyers for unprofitable operations.

R.B.S. has cut its balance sheet by approximately £600 billion ($922 billion) since 2008, and reduced noncore assets to less than £100 billion. That figure stood at £258 billion in September 2009.

Along with the sale of traditional loan portfolios, the bank has also been selling assets not traditionally associated with a financial institution.

R.B.S. announced in September that it had sold the five-star Hilton Hotel in Glasgow to the Topland Group for £35.7 million. In January 2011, the bank sold the Priory Group, an operator of long-term-care homes and addiction clinics, to the private equity firm Advent International in a deal worth £925 million.

Goldman Sachs and the law firm Clifford Chance advised R.B.S. on the deal. Barclays Capital, Sumitomo Mitsui Financial’s investment banking unit Nikko, as well as the law firm Milbank Tweed, advised Sumitomo Mitsui Financial.

Article source: http://dealbook.nytimes.com/2012/01/17/japanese-firms-to-pay-7-3-billion-for-r-b-s-aircraft-leasing-unit/?partner=rss&emc=rss

Borrowing Costs Fall for Italy and Spain in Debt Auctions

In Madrid, the Treasury said it sold €10 billion, or $12.7 billion, of bonds in total — twice the targeted amount — with yields falling about 1 full percentage point from previous auctions.

The Italian Treasury allotted all of the €8.5 billion of the 12-month bills it had targeted for sale, with its yields falling by half or more.

Both Spain and Italy are under intense pressure from investors because of their public finances, with recently installed governments scrambling to push through additional austerity packages to rein in deficits and debt levels.

The European Central Bank’s decision last month to aid struggling euro zone banks with longer-term refinancing operations has taken some of the heat off in recent weeks.

The E.C.B. is providing unlimited three-year credit on easy terms to banks, against a wide range of collateral. That has helped to reduce stress in the credit markets, and some say, could ease the so-called “refinancing hump” that euro zone governments face this year, under which they must roll over hundreds of billions of euros of maturing debt.

Harvinder Sian, a bond strategist at Royal Bank of Scotland in London, said the Spanish sale “went very well” and should cover about one-tenth of Spain’s borrowing needs for 2012.

Considering that the initial target of €5 billion was already a significant amount, he said, the fact of a €10 billion total issue “is almost unprecedented, to my mind.” Still, he said, there is a question about how much to read into the results, as “it’s hard not to see it as being a bit stage-managed.”

The solid showing by both countries on Thursday pushed down yields for 10-year bonds on secondary markets, although they remained at levels considered unsustainable by analysts in the medium and longer term.

The yield on Spanish 10-year bonds dropped to 5.1 percent, while Italy’s slid to 6.5 percent. German Bunds, the euro zone benchmark, were relatively unchanged at 1.8 percent.

In the auction Thursday in Madrid, the three-year bonds, which accounted for €4.3 billion, were sold at an average yield of 3.75 percent, compared with 4.87 percent at the previous auction of such bonds in July. Another €4.3 billion of a new three-year bond sold at a yield of 3.38 percent.

The Spanish Treasury also sold €3.2 billion worth of a bond maturing Oct. 31, 2016 for 3.91 percent, compared with 4.85 percent last November.

The 12-month bills sold by the Italian government were priced to yield 2.79 percent — down sharply from the 5.95 percent it paid to sell similar securities on Dec. 12.

Italy also sold €3.5 billion of three-month bills priced to yield 1.64 percent, down from 3.25 percent at the last auction.

Italy was hoping to sell another €4.75 billion of debt Friday.

David Jolly reported from Paris.

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