The Bank of Scotland has made serious regulatory failures in its risk systems and controls, according to the Financial Services Authority.
In a damning decision notice, the FSA said the bank, now part of Lloyds Banking Group, had committed "very serious misconduct" with the risks it took lending money to businesses between 2006 and 2008.
The regulator, however, decided not to fine the bank, because it is now part owned by the taxpayer following a multibillion pound bailout, and this would amount to UK citizens paying twice "for the same actions committed by the firm".
Bank of Scotland had focused on providing increasingly high risk lending, as part of an "aggressive" strategy, the FSA noted, with little regard for the worsening economy. Rather than carefully assessing risk, the bank was simply targeting maximum revenue while other lenders reduced their activities.
When the economy began to seriously falter in 2007, Bank of Scotland had been slow to react and failed to have the right systems in place. It also struggled to identify which elements of its loans portfolio were under stress.
Bank of Scotland lacked the right management information and adequate metrics, the FSA said, as well as too many key processes requiring manual intervention. All of these factors played a significant part in the bank having to be bailed out, the regulator said.
On Bank of Scotland's current website, the company describes how IT "allows us to share, analyse and store the information critical to our day-to-day functioning". It talks of "excellent technology" that "differentiates" it from rivals, that it develops quickly and at a cost "that compares to world-class benchmarks".
The FSA said it hoped that by publicly shaming the Bank of Scotland's risk practice in the years concerned, it would act as a "lesson in risk management failings".
"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," said Tracey McDermott, FSA acting director of enforcement.
"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."
A spokesperson at Lloyds said the period concerned was before its takeover of Bank of Scotland, adding: "This will help to draw a line under the events in question and allow the group to move forward."