Credit Suisse Group AG (CS - Snapshot Report) and Barclays PLC (BCS - Analyst Report) are in talks with the U.S. Department of Justice (DoJ) to settle investigations into their mortgage-backed securities, which triggered the 2008 financial crisis. The news was first reported by Bloomberg on Wednesday, citing people familiar with the matter.
Notably, a Credit Suisse deal is anticipated to be announced within a few weeks, per sources.
Are Provisions Enough to Bear the Settlement Charges?
Credit Suisse, the Swiss banking giant, had provisions of around CHF1.76 billion ($1.62 billion) as of the end of the second-quarter 2016, to cover its litigation expenses. Though the market speculates that the settlement charges could sum up to $2 billion, any amount higher than this can pose a problem for the bank.
Further, the bank is also fighting similar lawsuits with the New York and New Jersey attorney generals, who have accused it of misleading investors. Also, in addition to the mortgage-securities claims, Credit Suisse is facing allegations of rigging financial benchmarks and criminal complaints by its clients in Switzerland.
On the other hand, while Barclays currently maintains a provision of around £2.5 billion ($3.3 billion) for incurring investigation and litigation-related charges, the market speculates that it might have to pay less than $1 billion to settle its charges. However, the bank hasn’t specified a provision for a U.S. mortgage settlement.
Regulatory Concerns Linger for European Banks
Clearly, the U.S. regulators have now shifted their focus toward European banks. Only a few days back, Deutsche Bank AG (DB - Analyst Report) confirmed an initial claim for $14 billion from the DoJ, for settling its investigation into mis-selling of mortgage securities. However, the German banking giant has no intention to pay the amount sought by the DoJ.
Apart from these banks, UBS Group AG (UBS - Analyst Report) and HSBC Holdings Plc have also disclosed U.S. investigations into their mortgage-securities businesses. Per a source, DoJ officials are eager to settle the pending cases against lenders. However, the talks can extend or may not materialize ultimately.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>