Europe banks' Libor lawsuit hit seen lower after U.S. ruling

By Steve Slater and Matt Scuffham

LONDON, April 2 (Reuters) - European banks' potential lossesfrom private lawsuits related to interest rate rigging could bematerially lower after a U.S. judge dismissed a large portion ofsuch claims last week.

Some of the world's largest banks, including Britain'sBarclays and Royal Bank of Scotland,Switzerland's UBS and Germany's Deutsche Bank were facing claims totalling billions of dollars inthe U.S. case, which had been considered the biggest civil legalthreat that they faced.

A range of private plaintiffs, from bondholders to the cityof Baltimore, had accused 16 banks of conspiring to manipulatethe London Interbank Offered Rate (Libor), a key benchmark usedto price more than $550 trillion in financial products.

"Given that any loss estimate is still more art thanscience, investors need to bear in mind that civil litigationrisk from Libor could still be material, but is less likely tocompletely change the investment case than before," said ChintanJoshi, analyst at Nomura in London.

He said the outcome appeared to be substantially in favourof the banks involved, particularly regarding the potential forlonger-term losses.

Three banks have so far settled with U.S. and UK regulators,and all are European - Barclays, UBS and RBS. They have paid$2.6 billion in civil penalties.

UBS succeeded on Tuesday in sealing documents in two casesbrought by traders fired by the bank during its investigationinto rate manipulation.

Other European banks may face civil fines, and there hasbeen concern that payouts on class action lawsuits could easilyexceed civil penalties.

Europe's bank sector was up 0.7 percent by 1045 GMT,after a Monday public holiday. Deutsche Bank shares were up 1.3percent, Barclays was up 1 percent, UBS shares were up 0.2percent and RBS was down 0.2 percent.

Liberum Capital analyst Cormac Leech cautioned the legalprocess would be drawn out and that the plaintiffs could amendtheir suit or appeal the ruling.

"The ultimate payout for the banks remains highly uncertainin my view. I currently assume around 1 billion pounds ($1.5billion) for Barclays and RBS, but it could potentially be twoto four times that," he said.

Barclays, RBS, HSBC, Deutsche Bank, UBS and CreditSuisse Group AG all declined to comment.

Claims have come from large investors, local governments,home owners claiming rate rigging made their mortgages moreexpensive and small U.S. banks that have filed lawsuits accusingtheir big cousins of collusion.

The threat of hefty class action payouts has hung over theindustry because the manipulation of Libor casts doubt on everycontract that has used it as a reference point, potentiallyaffecting commercial borrowers with loans linked to Libor,investors holding portfolios of floating rate securities, orsavers being paid a rate of interest referencing Libor.

The U.S. federal watchdog in December estimated mortgagelenders Fannie Mae and Freddie Mac, which had to be bailed outduring the 2007/08 financial crisis, could have lost more than$3 billion as a result of Libor manipulation.

Assessing the level of potential payouts is complex,however, as Libor rates are calculated by averaging out banksubmissions and stripping out the highest and lowers outliers,making it harder to prove any individual bank caused a loss.

Credit Suisse analysts, in an in-depth assessment of litigation risk facing banks released last month, estimated 10European banks face a cost of about $571 million for classaction lawsuits, or 10 percent of the $5.7 billion in civilfines they are likely to pay.

Credit Suisse said plaintiffs were likely to have a higherchance of success if they could prove they incurred losses wherethere was evidence that banks jointly manipulated rates.