A large settlement last month between the U.S. Federal Housing Finance Agency (FHFA) and Swiss bank, UBS AG, means that the other big banks may decide to fight the cases against them, says Fitch Ratings in a new report.
The rating agency says that it believes that the size of the recent US$885-million settlement between the FHFA and UBS makes it more likely that banks with larger exposures may decide to fight the charges in court, and that they might have to increase their provisions for these costs.
The UBS settlement represented about 14% of the original value of the securities, which, Fitch says, seems high. Given this, more banks may decide to fight these cases, it says. “Although not necessarily setting a formal precedent, the high settlement cost to UBS relative to the outstanding portfolio amount could lead to additional provisions at other banks,” it says; adding, “This is likely to be a drawn-out process… which will perpetuate uncertainty of ultimate losses.”
Moreover, it notes that the settlements reached so far only deal with about 5% of the US$200 billion worth of securities in question. Fitch says it believes the quality and performance of the underlying securities is likely to play an important role in each bank’s ultimate exposure. However, it notes that estimating potential exposure for individual banks “is challenging given the unique circumstances of each institution.”
The FHFA claims are one of a series of mortgage-related legal and regulatory cases that a number of banks are facing, Fitch says. Nevertheless, it expects litigation and regulatory costs for the banking sector to remain high but manageable. “Statutes of limitation should result in a decrease in the number of new court filings in 2014, but current litigation is likely to drag on for a considerable time,” it says.