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'A stark reminder': RBS agrees £4.2 billion settlement with US over financial crisis misselling

The bank has reached a settlement over the misselling of $32 billion mortgage-backed securities in the run-up to the 2008 financial crisis.

A woman uses an ATM at a Royal Bank of Scotland (RBS) branch in London, Britain, February 25, 2010.

LONDON — Royal Bank of Scotland on Wednesday announced that it has reached a settlement with the US Federal Housing Finance Agency (FHFA) over the misselling of $32 billion of mortgage-backed securities in the run-up to the 2008 financial crisis.

RBS said in a statement on Wednesday lunchtime that it has agreed to pay $5.5 billion (£4.2 million) to settle with the FHFA, which is withdrawing its legal cases against RBS as part of the settlement.

However, $754 million (£581 million) will be reimbursed to RBS "under indemnification agreements with third parties," the bank said, meaning the net cost of the settlement is $4.75 billion (£3.65 billion).

RBS shares slid on the announcement of the fine but are still in positive territory, up around 0.2% at 2.20 p.m. BST (9.20 a.m. ET).

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The settlement is covered by RBS' existing reserves, having set aside £6.6 billion in the first quarter of 2017 to cover potential fines and settlements with the US.

CEO Ross McEwan says in a statement announcing the settlement:

"Today's announcement is an important step forward in resolving one of the most significant legacy matters facing RBS and is further evidence of the determination of the bank's leadership to put our remaining issues behind us.

"This settlement is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions."

The settlement relates to RBS' selling of residential mortgage-backed securities in the run-up to the 2008 financial crisis. Mortgage-backed securities were investment products made up of lots of different mortgages. However, the structure of the products disguised the underlying weakness of many of the mortgages that made up the constituent parts. The proliferation of these disguised, risky investments was a key factor in triggering the crisis.

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RBS says it still has legal challenges outstanding relating to around $1 billion worth of mortgage-backed security sales and says it "continues to cooperate" with the US Department of Justice on its investigations.

The ongoing Department of Justice investigation could prove to be hugely costly. The BBC's Business Editor reported in January that he spoke to investors who suggested that: "If the US Department of Justice (DoJ) slaps a fine around the $10 billion mark, there will be drinks all round at RBS HQ and the share price will probably go up."

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