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Royal Bank of Scotland to Face $12B Fine for RMBS Scam

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Shares of The Royal Bank of Scotland Group plc (RBS - Free Report) fell nearly 2% on the NYSE in the last trading session, amid market speculation of a potential fine to be paid by the bank to the U.S. Department of Justice (DoJ). The bank is under investigation by the DoJ for allegedly mis-selling residential mortgage-backed securities (RMBS) in the run-up to the 2008 financial downturn.

Per Executive Chairman of U.K. Financial Investments (UKFI), James Leigh-Pemberton’s statement to the Treasury Select Committee, "It could be $5 billion, it could be $12 billion, and based on what happened to Deutsche Bank it could be more.”

Established at the end of the 2007−2008 financial crisis, UKFI is the organization that manages the government’s stake of 73% in the Royal Bank of Scotland. The bank was assisted with a $57 billion government bailout during the financial crisis.

In addition, Pemberton laid out the probable financial impact of the latent fine on the bank’s share price and financial position, including the several lawsuits currently faced by the company. Notably, a fine of $12 billion would correspond to 1.5% of the bank’s total assets and 54.1% of annual revenue, as indicated by a source release. Further, Pemberton noted that the range of the fine is based on “market estimates” and the final settlement is still unknown. The negotiation between the regulator and the bank over the penalty is expected to begin in 2017.

The potential fine would mirror Deutsche Bank AG’s (DB - Free Report) situation, which is negotiating a similar probe by the DoJ to settle a $14 billion penalty against charges of unfair mortgage-backed securities sale by the German bank. The allegation has raised concerns about the future prospects of the bank.

Further, the regulator is preparing similar criminal charges against executives at JPMorgan Chase & Co. (JPM) for alleged sale of faulty mortgage securities prior to the 2008 financial crisis. (Read More: JPMorgan, RBS Executives Face DOJ Probe for 2008 Crisis).

Among other major banks, Citigroup Inc. (C - Free Report) , Morgan Stanley (MS - Free Report) and Bank of America Corporation, have paid billions of dollars to the U.S. financial regulators as penalties for settlement against charges of business malpractices in the pre-crisis period.

Royal Bank of Scotland currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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