The Royal Bank of Scotland will pay £3.85 billion to settle US claims that it misled investors on residential mortgage-backed securities between 2005 and 2007.
The US Department of Justice said it was the largest penalty imposed on a bank for misconduct during the financial crisis.
The Edinburgh-based bank promptly announced it was to pay a dividend to its shareholders for the first time in a decade.
The DoJ aid that RBS disputes the allegations and does not admit wrongdoing.
Taxpayer-controlled RBS said it reached a "final settlement" with the DoJ "to resolve its investigation into RBS’s issuance and underwriting of US residential mortgage-backed securities.
The bank said the financial and capital impacts of this agreement were recognised in the RBS Group and NatWest Markets Plc and other RBS entities half year results announced earlier this month.
RBS took the opportunity to announce it had resumed dividend payouts to shareholders after ditching them a decade ago.
The dividend is worth £240m and the Treasury will receive £149m as RBS is still 62%-owned by the government.
RBS said that in accordance with its intention announced on August 3, it "today declares an interim ordinary dividend of 2p per share". The dividend is to be paid on 12 October 2018 to shareholders on the register at the close of business on 24 August 2018.
Ross McEwan, RBS chief executive, said: “We are pleased to have reached a final settlement with the DoJ and that we can focus our energy on serving our customers better and returning capital to our shareholders.
“This settlement dates back to the period between 2005 and 2007. There is no place for the sort of unacceptable behaviour alleged by the DoJ at the bank we are building today.”
The penalty was agreed with the DoJ to end an investigation into sales of financial products in the run-up to the financial crisis, clearing the way for the UK government to sell its stake in the bank.
The DOJ settlement and the resumption of dividends were two of the last big milestones in RBS's decade-long journey back to normality.
RBS reported an operating profit before tax of £1.8bn for the first half of this year after taking an £801m litigation and conduct charge.
It reported its first annual profit in a decade in February, £752m for 2017, following a £7bn loss in 2016.
The penalty will take a slice out of the 2018 profits, but it had already set aside money for the penalty.
The resumption of dividend payments is expected to pave the way for further share sales.
The government cut its stake in the bank by almost 8% in June for £2.5bn but Philip Hammond, the chancellor, was forced to defend the move as the sale left taxpayers with a £2.1bn loss.
The shares were sold at 271p each, lower than the 502p at which the Treasury bought its stake a decade ago.
According to the DoJ, RBS made “hundreds of millions of dollars, while simultaneously ensuring that it received repayment of billions of dollars it had lent to originators to fund the faulty loans underlying the RMBS (residential mortgage-backed securities).”
The DOJ alleged that RBS used mortgage-backed securities to shift the risk of the faulty loans, and tens of billions of dollars in subsequent losses, onto “unsuspecting investors,” including retirement funds, and federally-insured financial institutions.
“As losses mounted, and after many mortgage lenders who originated those loans had gone out of business, RBS executives showed little regard for this misconduct and made light of it,” the DoJ claims.
According to the DoJ, RBS failed to reveal “systemic problems” with mortgage originators’ underwriting practices on the loans that were then securitised, despite allegedly knowing how many issues the loans had.
“RBS’ reviews of loans backing its RMBS confirmed that loan originators had failed to follow their own underwriting procedures, and that their procedures were ineffective at preventing risky loans from being made,” the DoJ said.
“As a result, RBS routinely found that borrowers for the loans in its RMBS did not have the ability to repay and that appraisals for the properties guaranteeing the loans had materially inflated the property values,” the DoJ added. “RBS never disclosed that these material risks both existed and increased the likelihood that loans in its RMBS would default.”
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