Morgan Stanley said it would pay $1.25 billion to the US regulator for state-backed mortgage guarantee companies Fannie Mae and Freddie Mac to settle a lawsuit related to the sale of mortgage-backed securities.
The Wall Street bank will add $150m to its legal reserves as a result of the settlement with the Federal Housing Finance Agency, Morgan Stanley disclosed in a regulatory filing.
The Federal Housing Finance Agency (FHFA) confirmed the settlement.
Several large US banks have set aside extra money to pay for potential legal costs in the aftermath of JPMorgan Chase's massive $13 billion settlement with US authorities over bad mortgages.
The FHFA in January said it had recouped nearly $8 billion through settlements with financial institutions it sued in 2011 over allegedly false and misleading statements relating to some $200 billion in mortgage-backed securities sold to Fannie and Freddie.
The housing authority commenced lawsuits against 18 financial institutions in 2011.
Last December, Deutsche Bank said it would pay $1.9 billion to settle claims, while Citigroup paid $250 million.
Morgan Stanley added $1.2 billion in the fourth quarter to its litigation reserves, and cited investigations "related to residential mortgage-backed securities and the credit crisis" as the motivation for doing so.
Chief Executive James Gorman had said the legal charges were a "significant progress" towards resolution of matters.
Morgan Stanley did not disclose specific details about the litigation in the filing.