The Financial Services Authority (FSA) has censured Bank of Scotland for failings within its Corporate Division between January 2006 and December 2008.
According to the regulator, the HBOS subsidiary was "guilty of very serious misconduct, which contributed to the circumstances that led to the UK government having to inject taxpayer funding into HBOS".
Between January 2006 and March 2008, the bank's corporate division pursued an aggressive growth strategy that focused on high-risk, sub-investment grade lending, with transactions gradually increasing in size, complexity and risk.
Its portfolio was high risk with highly concentrated exposures to property and to significant large borrowers and, according to the FSA, the strategy was "highly vulnerable to a downturn in the economic cycle".
Even after markets began to worsen in 2007, the division continued to increase its market share as other lenders started to pull out of the market and the FSA said the internal culture was "focused on revenue rather than assessing the level of risk in transactions".
In its summary findings, the FSA detailed how the Bank of Scotland did not have systems and controls that were appropriate to the high level of risks its Corporate Division was taking on.
Further failures meant the full extent of the stress within the corporate portfolio was not visible to the group's board or auditors.
Because public funds have already been used to address the consequences of the bank's failure, the FSA said it would not issue a fine, although it would have been warranted.
Tracey McDermott, FSA acting director of enforcement, said: "Banks and other firms have to manage their business by ensuring that their systems and controls are appropriate for the risks that they are running.
"The conduct of the Bank of Scotland illustrates how a failure to meet regulatory requirements can end not just in massive costs to a firm, but losses to shareholders, taxpayers and the economy."
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