Two major European banks have increased their litigation reserves and even acknowledged involvement in the unfolding Libor scandal, recognizing that this will drag on for perhaps years.

First, Deutsche Bank and UBS increased their expected costs as a result of the scandal.

Both banks are caught up in the scandal around the alleged manipulation of the London Interbank Offered Rate and related benchmark lending rates and on Tuesday topped up their estimates for litigation risk by a combined €580m. This reflects in part the expected costs of settling regulatory probes round the world [...]

In the three months to the end of June, Deutsche increased its estimate on unprovisioned litigation costs from €2.1bn to €2.5bn, while UBS added SFr210m to its litigation and regulatory provisions.

Both banks revealed more information about their potential exposure to the issue. UBS said the Libor affair had been taken up by attorneys-general in several US states, in addition to regulators and the US Department of Justice. Deutsche said it was being sued over claims it manipulated the Yen Libor rate and the price of derivatives tied to the Euroyen benchmark in a suit filed by US litigants in April.

I hadn’t heard about state AGs getting involved, so we’re moving to a more advanced stage.

Deutsche Bank also yesterday admitted the involvement of some of their staff in manipulating Libor:

Deutsche Bank has confirmed that a “limited number” of staff were involved in the Libor rate-rigging scandal.

However, it said an internal inquiry had cleared senior management of taking part in attempts to manipulate the rate at which banks lend to each other [...]

In a letter to staff, Deutsche Bank’s chairman of directors Paul Achleitner said: “A limited number of employees, acting on their own initiative, engaged in conduct that falls short of the Bank’s standards, and action has been taken accordingly.”

This is a clear “few bad apples” strategy. Deutsche tries to blame the rate-rigging on “rogue traders,” absolving senior executives from blame. If this stopped at an internal inquiry, I suppose they would be fine. But the scandal has become too large in too many countries for that to suffice.

It’s a good window into the industry strategy on this, however: try to pass it off on low-level staffers, and deny the more systematic rate-rigging, such as the period during the financial crisis when, according to a Barclays employee, everyone was rigging the Libor to mask their ill financial health. That behavior could only have come from the top, so it doesn’t get mentioned as prominently.

Deutsche and UBS are probably next in line for fines from global financial regulators. Expect action to be taken this fall.