By Paul J. Davies 

There is a price worth paying for certainty. For Barclays in its talks with U.S. prosecutors over pre-crisis mortgage bond sales that price was just too high.

The U.K. lender is now ploughing a lonely furrow by challenging the Department of Justice to prove its case in court while two European peers, Deutsche Bank and Credit Suisse, have both agreed preliminary settlements of the probe for $7.2 billion and $5.3 billion respectively.

A proposed settlement for Barclays of about $5 billion, according to the WSJ, was viewed by the bank as out of line with its behavior. Barclays believes its issuance of bonds in the misselling probe is less than half that of its European peers--and that it shouldn't accept a hefty payout.

While Deutsche and Credit Suisse investors will greet the deals with some relief, Barclays's investors face a nervous wait to see who blinks first--and what if any effect January's Presidential handover will have on the Justice Department's course. Donald Trump's Justice Department is likely to be more sympathetic to business, though the president-elect clearly relishes a fight.

The deals agreed by Deutsche and Credit Suisse are at the higher end of expectations--although for Deutsche, the figure is a dramatic improvement on prosecutors' initial demands for $14 billion. The German bank's shares jumped more than 4% initially on the news on Friday, while Barclays and Credit Suisse both slid a little more than 1%.

The banks will take charges in the fourth quarter, though only related to the part of their settlements that they must pay up front, a civil penalty, which is less than half the settlement total in both cases.

At Deutsche, which has EUR5.9 billion of litigation provisions, the civil penalty is $3.1 billion and will result in a charge of $1.17 billion as the rest is covered by existing provisions. That leaves Deutsche with about EUR4 billion of litigation provisions to cover other cases, the biggest and most uncertain of which is a probe into equity trades at its Russian arm.

Credit Suisse has fewer provisions in place, so the $2.48 billion civil penalty part of its settlement will result in a charge of $2 billion in the fourth quarter. However, that will shave less than 0.8 percentage points of its capital ratio and should see the group finish 2016 with a relatively comfortable common equity tier one ratio of 11.2%, according to Goldman Sachs.

These costs are bearable for both banks, though Deutsche still faces a huge challenge to get to its capital requirements for 2019. For Barclays, dragging the settlement uncertainty into next year will have its own costs: at least in terms of holding back its share price until certainty of whatever kind is reached.

Write to Paul J. Davies at paul.davies@wsj.com

 

(END) Dow Jones Newswires

December 23, 2016 07:47 ET (12:47 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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