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Published: Fri, May 11, 2018
Economy | By Melissa Porter

RBS reaches $4.9B settlement in United States probe of mortgage-backed securities

RBS reaches $4.9B settlement in United States probe of mortgage-backed securities

The Royal Bank of Scotland (RBS), a United Kingdom banking group, has reached an agreement with U.S. lawmakers to pay $4.9 billion to settle an investigation into its USA mortgage bond services.

RBS announced in a statement this morning that it had reached a civil settlement in principle with the DoJ to resolve its investigation into the lender's issuance and underwriting of U.S. residential mortgage-backed securities between 2005 and 2007.

RBS said 3.46 billion United States dollars (£2.5 billion) of the proposed civil settlement will be covered by existing provisions and the bank will take a 1.44 billion USA dollar (£1.1 billion) hit in its second quarter results.

"Further details remain to be negotiated, however, before a formal agreement", it said.

Commenting on the agreement, Ross McEwan, chief executive of RBS, described the settlement as a "milestone moment" for the bank.

It follows a separate fine of US$5.5 billion agreed in July 2017 with the Federal Housing Finance Agency over the same matter.

The settlements have weighed heavily on the bank amid fears over the size of the deals, with other banks having forked out mammoth sums.

The probe into RBS's sale of financial products from 2005 to 2007 was being carried out by the US Justice Department.

The British government announced in November that it planned to sell off £3 billion ($4.07 billion) worth of RBS shares in the 2018-2019 fiscal year and it looks as if those plans will now go ahead.

The market is buoyed by the news, with the company's share price up 4% to 287.1p.

This should also pave the way for the government, which still owns a 71 per cent majority of RBS, to begin selling down its stake.

He added: "This item hanging over a stock of our nature makes it more hard to sell".

The absence of the Department of Justice's attentions should make the stake sell easier as the bank can now concentrate on operating its business.

"Our policy remains to return the bank to private hands as soon as we can achieve fair value for the shares, recognizing that fair value could well be below what the previous government paid for them", UK Treasury chief Philip Hammond said in April.

While RBS still has to agree the final terms of the DoJ settlement, McEwan said the size of the penalty will not change.

The bank has paid nothing for ten years. Ongoing litigation meant the bank had been unable to pay dividends to shareholders and prevented increases in its share price.

Royal Bank of Scotland Group (LON:RBS) had its target price boosted by analysts at Shore Capital from GBX 265 ($3.59) to GBX 290 ($3.93) in a report released on Thursday.

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