By Sudip Kar-Gupta
LONDON (Reuters) - Barclays <BARC.L> put aside 1 billion pounds ($1.64 billion) to compensate people who were wrongly sold insurance and other UK banks backed down in their fight against accusations of mis-selling.
The banks said on Monday they would drop a planned appeal against a court ruling which had made them liable to compensation claims over the mis-selling of payment protection insurance (PPI).
Analysts have said the case could cost banks around 8 billion pounds ($13.1 billion).
"In the interest of providing certainty for their customers, the banks and the British Bankers' Association (BBA) have decided that they do not intend to appeal," the BBA said in a statement.
Barclays said it would make a 1 billion pound provision in the second quarter of 2011 to cover the cost of "future redress and administration" related to PPI mis-selling.
The hit to Barclays comes after rival Lloyds <LLOY.L> last week unveiled a shock 3.2 billion-pound charge to cover compensation.
"Many people had already factored in this potential hit to Barclays last week after Lloyds announced its provision," said Canaccord Genuity analyst Cormac Leech, who has a "buy" rating on Barclays shares.
Barclays said it had agreed with the Financial Services Authority (FSA) regulator to contact customers and to assess the situation.
"We have taken this decision because it is in the best interests of our customers, as well as for Barclays and its shareholders; creating certainty, particularly regarding past issues, is of benefit to all parties," Barclays Chief Executive Bob Diamond said in a statement.
"We don't always get things right for our customers; when we get them wrong, we apologize and put them right," he added.
The payment protection insurance policies were typically taken out alongside a personal loan or mortgage to cover repayments if customers fell ill or lost their jobs.
But the policies were mis-sold, to self-employed or unemployed people who would not have been able to claim, and to consumers who did not realize they were taking out a policy, and last month a court ruled that the banks were at fault.
Royal Bank of Scotland <RBS.L> said last week that it was too early for it to estimate the possible impact but said settling claims could be "material."
Bank of America <BAC.N> has also raised its provision for insurance mis-selling to $650 million from an original $592 million.
HSBC <HSBA.L> mayo provide an update on its exposure to PPI mis-selling when it unveils a first-quarter trading update later on Monday.
(Editing by Paul Hoskins and Chris Wickham)