(Adds comments from CEO, context)
By Steve Slater
LONDON, July 18 (Reuters) - An investigation into allegedmanipulation of foreign exchange markets could pose a biggerproblem for banks than the Libor interest rate rigging scandal,the boss of Royal Bank of Scotland said on Friday.
RBS paid $612 million last year to settle allegations thatit manipulated Libor rates, one of several banks hit with bigfines for rigging financial benchmarks. Regulators are nowinvestigating allegations that traders manipulated key referencerates in the $5 trillion-a-day foreign exchange market.
Asked if the FX investigation could be a bigger problem forthe industry than Libor, RBS Chief Executive Ross McEwan said:"Unfortunately, it has the hallmarks".
McEwan, speaking on LBC radio, added: "We're still doing alot of investigation. We're going through just millions andmillions of emails, chatrooms, conversations to see whatactually went wrong, if anything, in this area.
"Unfortunately, I have the feeling that this is a sort ofLibor case again ... The difference this time is that we haven'tsat back and denied it. We've gone into it and are doing theinvestigation hand-in-hand with the authorities."
McEwan said it was another problem from the past that banksneed to clean up to be able to move on. His bank has disclosed anumber of investigations but it could take until 2016 beforethey are cleared, he said.
"There are a number of litigation and conduct issues that weare still having to grapple with that will come out over thenext 18 months," McEwan said.
U.S. and European regulators have handed down about $6billion in fines to 10 banks and brokerages, including UBS, Barclays and Deutsche Bank foralleged rigging of Libor and its euro cousin Euribor, and morebanks are expected to be hit.
The industry is striving to take steps to reform currencybenchmarks and show it is cleaning up its act, and a blueprintfor change was laid out by the Financial Stability Board earlierthis week.
But a number of industry analysts have said the combinationof fines from investigations in more than half a dozenjurisdictions worldwide, and the potential for suits by fundmanagers and other investors, could saddle banks with a billseveral times costlier than Libor.
Benchmark foreign exchange rates are used to set the valueof trillions of dollars of investments and regulators arelooking at whether traders at some of the world's biggest bankscolluded to manipulate the rates.
Martin Wheatley, chief executive of Britain's FinancialConduct Authority, said earlier this year allegations about FXwrongdoing were "every bit as bad as they have been with Libor". (Additional reporting by Patick Graham; Editing by Tom Pfeifferand David Holmes)