Banks boost FX settlement war chest to as much as $6.5 billion

By Jamie McGeever

LONDON (Reuters) - Major U.S. and European investment banks this month boosted to as much as $6.5 billion (4.06 billion British pounds) their collective war chest for settling with global regulators who are investigating allegations of collusion and manipulation in the foreign exchange market.

Royal Bank of Scotland (RBS.L) on Friday became the latest bank to make provisions in its third-quarter earnings report, putting aside $640 million specifically for potential settlements in the global inquiry that has been running for more than a year.

Not all the total of $6.5 billion set aside by seven banks in their latest earnings reports over the last few weeks will go solely to currency-related issues. But that's where most of the total is likely to be spent.

Swiss bank UBS (UBSN.VX) ring-fenced the most of any single bank in the third quarter, its $1.9 billion almost double the provisions made by the next in line, Deutsche Bank (DBKGn.DE), with $1.1 billion and JP Morgan (JPM.N) with $1 billion.

Those three banks declined to disclose how much of the provisions were specifically for foreign exchange.

No bank has been accused of wrongdoing, but several are cooperating with UK, U.S. and as many as 10 other authorities around the world in their investigations into the allegations of collusion and price manipulation.

Earlier this week, British bank Barclays (BARC.L) set aside $800 million for FX-related settlements and Citi (C.N) added a further $600 million for legal costs, while Credit Suisse said $400 million would be kept back for future litigation.

This all comes as a settlement between the UK financial market regulator and a group of major banks before the end of the year - maybe as soon as next month - draws into view.

The Financial Conduct Authority (FCA) and six banks are in advanced talks over a settlement that may be worth 1.5 to 2 billion pounds ($2.4-$3.2 billion).

The six banks are RBS, Barclays, UBS, JP Morgan, Citi and HSBC (HSBA.L). Curiously, given its position as the second- biggest currency market bank in the world, Deutsche Bank isn't part of these collective talks.

HSBC releases its third-quarter results on Monday.

This settlement is likely to be based on banks acknowledging lax internal compliance, oversight failures and market conduct breaches by individual employees, but not deliberate manipulation of the $5 trillion-a-day market.

Settlements with U.S. authorities are expected to be much more costly, particularly with the Department of Justice (DOJ), which has shown it has the power and willingness to levy multi-billion dollar fines on banks for financial misconduct.

Earlier this year, French bank BNP Paribas (BNPP.PA) paid the DOJ a record $8.9 billion fine for violating U.S. sanctions on Sudan, Libya and Cuba between 2002 and 2012.

Estimates on how much banks will be fined in total vary wildly. Earlier this year, banking research firm Autonomous put the worldwide total at around $35 billion.

This would dwarf the $6 billion paid by 10 financial firms to settle an international investigation into the manipulation of Libor interest rates.

(Reporting by Jamie McGeever; Editing by Larry King)