The banks involved in the Libor scandal may face crippling legal fines according to analysts estimate. Royal Bank of Scotland Group plc (NYSE:RBS) and Deutsche Bank AG (NYSE:DB) are expected to pay the highest legal costs.

According to Bloomberg, Betsy Graseck of Morgan Stanley in New York and Huw van Steenis in London estimated that the possible litigation fines for Royal Bank of Scotland will reach as much as $1.06 billion. Deutsche Bank may face $1.04 billon; Lloyds Banking Group PLC (LON:LLOY) will pay around $59 million, while Switzerland’s largest bank UBS AG (NYSE:UBS) (FRA:UBRA) will have an estimated litigation fine of $254 million. Both analysts suggest that the fines maybe implemented by 2013 to 2014.

Last month, Barclays PLC (LON:BARC) (NYSE:BCS) agreed to pay $450 million regulatory fines to settle the Libor related charges against the bank. Barclays was the first bank involved in the probe that provided “extensive and meaningful cooperation to the government,” according to the United States Department of Justice.  According to the U.S. Commodity Futures Trading Commission (CFTC), Barclays manipulated the Libor rates for a period of four years, almost everyday starting in 2005.  Embarrassed by the controversies, the top three executives of the bank resigned from their positions including Marcus Agius, Chairman; Bob Diamond, CEO and Jerry del Missier, COO.

Gracseck and Steenis explain in their report that they calculated the litigation costs for other banks based on an implied penalty of $650 million. According to them, the regulatory fines may result to a 7 percent to 12 percent reduction in the 2012 earnings per share for all the banks implicated in the case.

The analysts also cite in their report that they estimated the litigation costs for all 16 banks named in the Libor manipulation lawsuit based on the assumption that the Libor was understated daily for 4 years by 0.01 percentage point, which resulted to a total collective costs of $6 billion. The analysts also evaluated the size of the interest-rate derivatives holdings of each bank.  According to them, the estimates “are the result of significant assumptions, but we hope to at least provide a framework for how to assess the Libor litigation risk.”

In a related story, during an interview with the CNBC Squawk Box, Billionaire Investor Warren Buffet said that the Libor Scandal is a big deal. According to him, everyone must pay attention to the issue. The collateral damage caused by banks involved in the Libor manipulation is difficult to resolve because it involves a significant number of contracts. Buffet said, “You get Libor, and you’re talking about the whole world. The idea that a bunch of traders can start e-mailing each other or phoning each other and play around with that rate is an important thing, and it is not good for the system. It is a can of worms.”