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Barclays in no rush to settle with DOJ over alleged misselling of RMBS

Barclays Plc's decision to fight the U.S. Department of Justice over alleged misselling of residential mortgage-backed securities means the bank is in no rush to agree on a settlement with the U.S. authorities, according to analysts.

The DOJ is suing Barclays on the basis that the British lender securitized billions of dollars of defective home loans in the run-up to the 2008 global financial crisis and that it lent to mortgage providers who were issuing loans that borrowers would not be able to repay.

"They haven't wanted to accept a settlement, so I don't think they are in any hurry," said David Grinsztajn, analyst at Alphavalue in Paris.

Barclays is one of several European banks being investigated by the DOJ in the wake of the subprime crisis in the United States, and the news of its refusal to accept a fine comes as both Credit Suisse Group AG and Deutsche Bank AG said they had reached settlements with the DOJ concerning RMBS offenses. If Deutsche Bank's agreement is finalized, it will have to pay a $3.1 billion penalty and $4.1 billion in consumer compensation, while Credit Suisse would pay a $2.48 billion fine and $2.8 billion in compensation.

In September, Royal Bank of Scotland Group Plc agreed with the U.S. National Credit Union Administration to pay $1.1 billion to resolve two outstanding civil lawsuits alleging that it missold residential mortgage-backed securities. It also faces a potential fine of between $5 billion to $12 billion from the DOJ to settle MBS misselling claims in the U.S.

Unwilling to pay high fine

The size of Barclays' DOJ fine has not been revealed, but "people close to the Barclays board" told the Financial Times that the lender had been ready to pay a penalty of $1 billion but felt it was asked to pay a disproportionate amount of money compared to its U.S. peers.

"Barclays considers that the claims made in the Complaint are disconnected from the facts," the bank said in a statement. "Barclays will vigorously defend the Complaint and intends to seek its dismissal at the earliest opportunity."

Jefferies analyst Joe Dickerson told S&P Global Market Intelligence that the proposed DOJ fine was likely to be "north of $3 billion," adding: "I would have thought that if the number were between $1 billion and $3 billion, then Barclays might have settled."

Grinsztajn estimated that the bank's exposure to the subprime crisis was about $4 billion, saying this was "very small" compared to RBS or Deutsche Bank.

"They will be fighting for $1 to $2 billion — we are not talking about anything tangible," he said in an interview. "It's not a major challenge compared to an RBS. It's something that is quite manageable."

Barclays has set aside $3.1 billion to cover litigation and penalties but has not made a specific provision for the mortgage probe, according to a Reuters report that quoted JPMorgan analysts as saying that a settlement of over $1.5 billion would lead to increased provisions and could impact the bank's core capital ratio.

Tough opponent

Barclays may be biding its time until it completes the sale of its African business, which will leave it in a stronger capital position to handle a fine, Dickerson said.

The bank is in the process of off-loading its stake in Barclays Africa Group Ltd., and the sale could boost the lender's capital ratio by a full percentage point.

But in fighting the DOJ, Barclays might be taking on a rather tough opponent, as it knows from experience. In 2015, the bank challenged the DOJ over a fine for forex manipulation and was ordered to pay out £284.4 million as part of a £1.5 billion settlement to the British FCA and four U.S. regulators for rigging foreign exchange markets, Dickerson pointed out.