European banks braced for big bill for U.S. mortgage litigation

* Total cost could reach $11 bln - analysts

* Deutsche Bank has set aside extra 600 mln euros

* Five banks at risk of heavy losses

By Steve Slater

LONDON, March 22 (Reuters) - European banks squeezed byregulatory demands for higher capital buffers could take anadditional $11 billion hit from mortgage-related litigationcosts in the United States.

Deutsche Bank has already bumped up itsprovisions, this week setting aside an additional 600 millioneuros ($777 million) for litigation costs, mainly related tolawsuits over its role in selling bonds backed by U.S. sub-primemortgages.

Clients who bought the mortgage-backed securities fromDeutsche and other banks feel they were misled about the qualityof the assets, which rapidly lost value after the U.S. mortgagemarket collapsed between 2006 and 2009.

Deutsche has not broken out its U.S. mortgage litigationprovision, but analysts at Credit Suisse estimate thatit could reach $2.1 billion.

The Credit Suisse research suggests that Swiss bank UBS could be hit even harder, with a potential cost of$3.5 billion, and estimates the bill for five European lenderswill come in at $11 billion.

The potential litigation over U.S. residential mortgagescovers several areas, including legal proceedings with theFederal Housing Finance Agency (FHFA), losses from therepurchase of securities and from class action lawsuits.

The FHFA action, filed in September 2011, is one of several- against 17 financial organisations - alleging violations oflaws in connection with the sale of residential mortgage-backedsecurities (RMBS) purchased by Fannie Mae and Freddie Mac.

$70 BILLION AT RISK

The U.S. lawsuits are among many litigation risks facingbanks. Credit Suisse analysts assessed 38 areas of potentiallitigation at 10 European banks and said that the total costcould be $70 billion of capital.

UBS said its balance sheet at the end of 2012 reflected aprovision of $658 million with respect to RMBS claims, but itsannual report acknowledged that the cost could be substantiallymore or less than this.

A trio of British banks also face U.S. mortgage-relatedlitigation bills.

State-backed Royal Bank of Scotland (RBS) couldsuffer a loss of $2.4 billion, Barclays faces apotential $1.7 billion hit and HSBC could end up with abill for $1.1 billion, the Credit Suisse analysts estimated.

Barclays said in its annual report that it will defenditself against the claims. Defeat, however, could result in aloss up to the outstanding amount of the relevant RMBS at thetime of judgment, less the market value.

The bank said that the outstanding amount of RMBS related tothe claims was $2.7 billion at the end of December and themarket value was $1.6 billion. Cumulative losses reported onthese RMBS was about $400 million at the end of December, itsaid.

RBS, meanwhile, has said that it has substantial legal andfactual defences to mortgage-related claims and will continue todefend them.

HSBC's annual report said the bank was unable to make areliable estimate of the financial effect of any potentiallitigation but said that claims could be significant.

Credit Suisse itself is involved in some U.S.mortgage-related litigation, relating to its roles as issuer,sponsor, depositor, underwriter or servicer of RMBStransactions, according to its annual report released on Friday.

The bank's analysts do not cover Credit Suisse.