Big banks in the U.S. and Europe are stockpiling billions to pay for a potential trans-Atlantic settlement of allegations that they manipulated foreign-exchange rates as talks heat up with regulators on both continents.
The possibility of a major deal soon, instead of the firms settling with regulators one by one, is a new wrinkle in the long-running talks to settle foreign-exchange probes that have ensnared about a dozen banks in the U.S. and Europe.
Several people familiar with the discussions said banks appeared more optimistic of reaching a global settlement than U.S. regulators. One person said the direction of the talks was changing by the hour.
Some of the people familiar with the matter said they are skeptical that all the U.S. regulators will go for a settlement alongside their U.K. counterparts. Among the U.S. agencies, there are varying degrees of enthusiasm for one big deal: The Justice Department, in large part because it is handling criminal probes of the conduct, expects resolutions of its probes to take months more, some of these people said.
New York-based Citigroup Inc. on Thursday said it had to set aside an extra $600 million in legal provisions over what it had already budgeted for the third quarter. The bank said the extra expense was a result of “rapidly-evolving regulatory inquiries and investigations.”
The increase is tied to the foreign-exchange probe, according to people familiar with the matter. Citigroup disclosed Thursday that the U.S. Justice Department, the CFTC, the U.K.’s Financial Conduct Authority and the Swiss Competition Commission are looking into its foreign-exchange business. Citigroup said it is cooperating with the probe. Citigroup had previously reported net income of $3.44 billion, but it lowered this figure to $2.84 billion, knocking its earnings per share from $1.07 to 88 cents per share.
The investigations into allegations of improper behavior by currency traders have been looming over banks for months. But, in recent days, some U.S. and U.K. regulators have been moving to consolidate the settlements, a shift supported by the banks, according to people familiar with the matter.
The change in the settlement discussions occurred three or four days ago, in large part due to encouragement from the Federal Reserve and U.K. regulators to fast-track the talks and bring the sides together, these people said. But the settlements may not shake out before the end of this year, and the talks are still in the early stages and could collapse, these people said, since they involve multiple agencies and several banks with diverse agendas.
Some banks were told their individual settlements could range between $500 million and $1 billion, but that those numbers could easily change, one of these people said.
The banks would prefer to settle together, because it would allow them to air their bad news all at once, the people familiar with the matter said. Some regulators also would prefer to settle the matter relatively soon, these people said, and are worried it will reflect poorly on them if other agencies settle first.
In recent weeks, Justice Department officials have ramped up pressure on the banks to cooperate and account for their alleged misconduct in the foreign-exchange markets, according to a person familiar with the talks. Negotiations are still in their early stages and no settlement figures have been reached, the person said.
The Wall Street Journal previously reported that the Justice Department has been focusing its investigation on bank sales staff. The regulators have been trying to discern whether the banks were misleading customers about pricing, the Journal reported.
While British authorities are seeking resolutions of their foreign-exchange cases in November, that is a faster schedule than the U.S. agencies envision, people familiar with the matter said. There is a chance one of the banks could settle with the U.S. agencies before next year, but officials increasingly expect any U.S. settlements would come in 2015, these people said.
Citigroup is part of a group of U.S. and European banks that are in advanced discussions with the U.K.’s finance regulator toward a settlement on similar issues. The foreign-exchange probes have led to the suspension or firing of more than 30 traders at about a dozen banks, including Citigroup.
In the U.S., the Fed, the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission are speaking to a group of banks, including Citigroup, Barclays PLC, and J.P. Morgan Chase & Co. about the settlement. Those banks and others, including HSBC Holdings PLC, UBS AG, Deutsche Bank AG and Royal Bank of Scotland Group PLC, are in talks with U.K. regulators, these people said.
The banks have all said they are cooperating with the probes.
In its original earnings report earlier this month, Citigroup said its quarterly legal expenses jumped 40% to $951 million from the previous year. That same day, J.P. Morgan—which is also in discussions with regulators about allegations of foreign-exchange rigging—said its legal expenses had risen about $400 million from the prior quarter. Thursday’s disclosure at Citigroup takes the bank’s quarterly legal provisions to more than $1.5 billion.
Barclays on Thursday set aside an extra $800 million in legal provisions and confirmed it was for the investigations into alleged manipulation of the foreign-exchange market. Barclays has said it is cooperating with investigators.
Investors will be watching closely for more disclosures from other banks in coming days, from the Royal Bank of Scotland’s earnings results Friday to the coming quarterly filing by J.P. Morgan, the largest U.S. bank by assets.
The Barclays provision is the first time the bank has set aside money to cover the foreign-exchange probes. As of June 30, the bank had about £2.6 billion ($4.2 billion) set aside to cover customer redress and litigation.
The initial probes were propelled, in part, by a separate inquiry into allegations employees at numerous banks rigged the London interbank offered rate, the interest-rate benchmark also known as Libor. As banks struck deals to cooperate in that probe, their assistance produced new leads on possible manipulation in currencies, these people said.
The escalation of the forex probe, which began last year, is a contrast to the investigations into Libor manipulation, which have dragged on for more than five years.
—Jean Eaglesham and David Enrich contributed to this article.
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