LONDON HSBC Holdings Plc, Europe's biggest bank, said it could take a hit of up to $1.6 billion in a settlement with a U.S. regulator over allegations it mis-sold mortgage-backed bonds during the housing bubble.
The Federal Housing Finance Agency (FHFA), the conservator of Fannie Mae and Freddie Mac, has alleged 18 banks misrepresented the quality of the collateral backing securities between 2005 and 2008.
Swiss bank UBS paid $885 million in a settlement with the FHFA last month and Citigroup and General Electric have settled for undisclosed sums.
"Based upon the information currently available, it is possible that these damages could be as high as $1.6 billion," HSBC said in a filing alongside half-year results on Monday.
HSBC has previously said the financial effect of any litigation "could be significant" but it has never estimated what it could be.
HSBC said it had been named as a defendant in a number of actions in connection with its residential mortgage-backed securities (RMBS) offerings, which generally allege the documents contained misstatements and omissions.
HSBC said discovery in the action against it "is proceeding apace" and the FHFA's lawsuit asserts claims for damages and rescission and alleges the banks caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac.
Rivals, including Credit Suisse and Deutsche Bank, have set aside money to cover the cost of any losses arising from the dispute, but estimates on possible costs vary widely. Analysts at Credit Suisse had estimated HSBC could take face a $900 million loss from the litigation.
(Reporting by Steve Slater, editing by Louise Heavens)