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Royal Bank of Scotland has agreed a $5.5 billion (£4.2 billion) settlement with the US Federal Housing Finance Agency (FHFA) for its role in underwriting around $32 billion (£25 billion) in toxic residential mortgage-backed securities.

RBS said under the settlement agreement it will pay FHFA, acting as conservator for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), $5.5 billion (£4.2 billion), of which $754 million (£581 million) will be “reimbursed to RBS under indemnification agreements with third parties”.

The cost to RBS, net of the indemnity clawback, is $4.75 billion (£3.65 billion) which the bank said is “largely covered by existing provisions”.

RBS chief executive Ross McEwan said: “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.”

RBS noted in 2016 full year results it had to date booked £6.8 billion in provisions to cover various US claims for its role in selling and securitising toxic residential mortgage-backed securities (RMBS) and at the end of Q1 of 2017 the provision held was £6.6 billion.

The bank said it will book an incremental charge of $196 million (£151 million) in Q2 2017 results.

The remaining £3 billion RMBS provision relates to a number of unresolved RMBS litigation matters, including an expected multi-billion pound fine from the US Department of Justice.

The bank said as a result of the settlement, the FHFA’s outstanding litigation against RBS will be withdrawn.

Edinburgh-headquartered RBS has yet to reach a settlement with the US Department of Justice for its role in the RMBS scandal, though RBS warned in a third-quarter update last year, any fine could result in a “substantial” additional provisions being taken.

However the bank said today it is making no further provision relating to RMBS matters as a result of today’s settlement but adds it “continues to advise that further substantial provisions and costs may be recognised and, depending upon the final outcomes, other adverse consequences may occur”.

UK Financial Investments, the arms-length body managing the stake taken in RBS during the financial crisis, previously estimated the US Department of Justice fine could be in the region of $12 billion (£9.4 billion), given the scale of RBS's role in the RMBS mis-selling scandal.

In 2016 accounts RBS listed 30 outstanding litigations, investigations and reviews, including redress for thousands of small businesses mistreated by its now disbanded Global Restructuring Group.

RBS noted Coutts Bank is also being investigated for alleged breaches of anti-money laundering rules and had responded to an FCA inquiry on its relationship with the Panama-based law firm Mossack Fonseca and “individuals named in recent media coverage in connection with the same”.

The bank recently settled a claim brought by shareholders surrounding its £12 billion rights issue in 2008, which it is reported to have cost more than £1 billion in compensation and legal fees.

RBS is also facing US class action lawsuits for its role in foreign exchange rate manipulation, manipulation of US Treasury securities and mis-selling interest rate hedging products.

Shares in RBS were up 0.4 per cent in afternoon trading.