ROYAL Bank of Scotland has said it paid a “heavy price” for past mistakes as it agreed a £4.2 billion US settlement over claims it mis-sold toxic mortgage bonds in the run-up to the financial crisis.

The taxpayer-backed lender struck the deal with the Federal Housing Finance Agency (FHFA) to resolve one of two major US investigations into mis-selling allegations.

It has yet to reach a settlement with the Department of Justice (DoJ), which is expected later in the year.

Ross McEwan, chief executive of the bank, said it was “an important step forward in resolving one of the most significant legacy matters facing RBS”.

“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,” he added.

While the bank will pay $5.5bn (£4.2bn) in total to the FHFA, $754m (£581m) will be repaid to RBS by other parties under a so-called indemnification agreement. RBS said the net £3.65bn cost of the settlement with the FHFA would be largely covered by funds set aside.

But it will take a £151m charge in its second-quarter results for the deal. RBS had already put aside £6.6bn to cover US mis-selling claims.

The expected US settlements have weighed heavily on the bank amid fears over the size of the deals, with other banks having forked out mammoth sums.

RBS is one of the last to settle with US regulators, following rivals such as Deutsche Bank, which agreed to pay $7.2bn (£5.6bn).

It has also been a major hurdle to the bank’s return to private hands, with the Government having said the US mis-selling claims must to be resolved before it can start to sell its shares in the lender.

RBS finance chief Ewen Stevenson said the FHFA settlement was “in the region of what we’d been anticipating”, but analysts said it was higher than forecast in the City.

RBS said it had not yet started discussions with the DoJ.

McEwan cautioned that the bank may need to set aside more cash to settle outstanding claims. “We have always been very open about the fact there could be further provisions,”

he said.

Analyst Joseph Dickerson, from Jefferies, said the US mis-selling settlement was around £776m higher than he had expected.

He predicts RBS will need to set aside another £1.9bn for the DoJ deal in the fourth quarter.

Dickerson said: “This settlement clears a major hurdle for the bank, though there remain further signif- icant RMBS [mortgage-backed sec- urity] related costs, such as the DoJ.”

McEwan is seeking to draw a line under legacy issues for RBS, which is still 71 per cent owned by the Government following its £45.5bn bailout at the height of the financial crisis.

RBS last month reached a deal with thousands of UK investors to avoid a high-profile court trial.

Investors were planning to take RBS to court amid claims they were left nursing hefty losses following a £12bn cash-call, with the lender’s shares collapsing soon afterwards as a result of its part-nationalisation.