UBS's loss is public finances' gain in U.S. and UK

Swiss bank UBS's $1.5 billion fine for interest rate rigging is likely to find its way into U.S. and British state coffers, providing enough to build around 60 U.S. middle schools or fund healthcare for about 60,000 typical American families.

The fine, split about $1.2 billion for the United States and $260 million for Britain, is a drop in the ocean for two countries struggling to rein in huge budget deficits. The United States racked up a deficit of $172 billion in November alone.

However, cash-strapped governments are keen to raise funds from wherever they can, and with banks being pursued for a string of alleged misdeeds during the run-up to the global financial crisis, this source of revenue is getting bigger.

Britain had, until recently, used regulatory fines on banks to reduce the levy the industry pays to support the Financial Services Authority (FSA) watchdog.

"We do not think it is fair that the fines from scandal-hit banks go back into the banking industry," Prime Minister David Cameron said earlier this year, after the government decided to use a fine on Barclays - also for interest rate rigging - to support military servicemen and their families.

UBS on Wednesday admitted to fraud, paying bribes to brokers, and manipulation of global benchmark interest rates by dozens of stuff. It is the second largest fine paid by a bank after Britain's HSBC agreed to pay $1.9 billion last week to settle a U.S. money laundering probe.

The U.S. fine on Barclays was funnelled from the U.S. department of Justice (DoJ) to the Treasury and ultimately became part of general U.S. expenditure.

A spokeswoman for the DoJ, speaking on Tuesday night before the UBS fine was announced, declined to comment on whether any penalty would be treated in the same way. The U.S. Treasury also declined to comment.

The U.S. portion of the fine would be enough to build 60 middle schools at an average $20 million apiece or to fund healthcare for 60,000 typical American families at an average cost of $20,000 per family.

NEGATIVE CONSEQUENCES

In Britain, a Financial Services Bill going through parliament paves the way for regulatory fines in excess of enforcement case costs to go the exchequer, a Treasury spokesman told Reuters.

"They (fines) can be applied to reduce borrowing or fund public spending," he said, speaking on Tuesday night. "The government is not going to speculate on how future revenues from regulatory fines will be spent."

If the money is used to reduce borrowings, it would make an approximate 0.13 percent dent in Britain's budget deficit in the year to April 2013, which is expected to come in at just over 120 billion pounds.

"It can make the public finances a little bit better for months, but in the context of an underlying deficit of 120 billion to 130 billion pounds, while whatever they get will be welcome it's not going to be a game-changer," said Philip Shaw, chief economist with Investec.

In the longer term, there could be negative economic consequences, he added.

"You have to remember that you're also hurting the balance sheets of the banks, and their ability to raise capital," he said. "So while you might get a one-off boost, you could be impeding public finance by restricting credit."