UPDATE 1-Banks boost FX settlement war chest to as much as $6.5 bln

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By Jamie McGeever

LONDON, Oct 31 (Reuters) - Major U.S. and Europeaninvestment banks this month boosted to as much as $6.5 billiontheir collective war chest for settling with global regulatorswho are investigating allegations of collusion and manipulationin the foreign exchange market.

Royal Bank of Scotland on Friday became the latestbank to make provisions in its third-quarter earnings report,putting aside $640 million specifically for potentialsettlements in the global inquiry that has been running for morethan a year.

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

Swiss bank UBS ring-fenced the most of any singlebank in the third quarter, its $1.9 billion almost double theprovisions made by the next in line, Deutsche Bank,with $1.1 billion and JP Morgan with $1 billion.

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

No bank has been accused of wrongdoing, but several arecooperating with UK, U.S. and as many as 10 other authoritiesaround the world in their investigations into the allegations ofcollusion and price manipulation.

Earlier this week, British bank Barclays set aside$800 million for FX-related settlements and Citi added afurther $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 financialmarket regulator and a group of major banks before the end ofthe year - maybe as soon as next month - draws into view.

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

The six banks are RBS, Barclays, UBS, JP Morgan, Citi andHSBC. Curiously, given its position as the second-biggest currency market bank in the world, Deutsche Bank isn'tpart of these collective talks.

HSBC releases its third-quarter results on Monday.

This settlement is likely to be based on banks acknowledginglax internal compliance, oversight failures and market conductbreaches by individual employees, but not deliberatemanipulation of the $5 trillion-a-day market.

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

Earlier this year, French bank BNP Paribas paidthe DOJ a record $8.9 billion fine for violating U.S. sanctionson Sudan, Libya and Cuba between 2002 and 2012.

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

This would dwarf the $6 billion paid by 10 financial firmsto settle an international investigation into the manipulationof Libor interest rates.

(Reporting by Jamie McGeever; Editing by Larry King)